Masters of Scale Episode Transcript: Barry Diller (Part 1)

REID HOFFMAN: ​Every executive and every entrepreneur will face moments of
truth…Moments when their skill is judged. When their worth is determined. When the powers
that be will cast their votes, and determine if your project or company lives or dies.

Barry Diller was facing one of these moments. The media titan was in a screening room,
presenting a new alternative sitcom to a group of executives. It was not going well.

BARRY DILLER​: When you're watching something as a group of people, and you are
involved in it, and they're seeing it for the first time: You laugh, a lot. I mean, partly out of
pride, and partly because you're almost daring everybody else not to laugh.

HOFFMAN:​ Apart from Barry and the creator of the show…nobody was laughing.

DILLER​:...the only two people laughing in a room of like 10 people.

HOFFMAN: ​The tension in the room was palpable. Barry had already ordered 13 episodes, and
everybody agreed: It was a mistake.

DILLER:​ "Well, is there any way to get out of this? Is there any way? This is a disaster,
we can't put this on the air," dah dah dah dah. …

HOFFMAN: ​Barry was CEO of the newly founded Fox Television Network. This was before Fox
became synonymous with conservative politics. Back then, it was the gutsy alternative network
— a challenger to the establishment.

DILLER:​ Well, we were the fourth network so we had to not be like the other three...the
only thing we should do is be an alternative to the three networks.

HOFFMAN: ​Barry wanted to write his own rules. He wanted to be ​alternative​. What was this
alternative show that Barry was so convinced would be a hit?

DILLER: ​Probably the most successful series in the history of television, The Simpsons.

HOFFMAN: ​Barry Diller greenlit what is now the longest running sitcom in the history of
television. He brought us Homer, Marge, Bart, Lisa, and Maggie…and of course, Itchy and
Scratchy.

And I would argue that Barry’s reaction to this challenge — the way he almost ​revels​ in his
ignorance — is a hallmark of his career. He thrives at the bottom of a steep learning curve.

DILLER:​ All my life, the only things that interest me are things that hadn't been done.
 I learned really early that you are best when you know nothing. You have your life
experience, or who you are, and all of that, but you're best off in situations where there
are no markers.

HOFFMAN: ​Many of the iconic entrepreneurs I’ve met, start out in the same position — at a
point of supreme ignorance. What sets them apart is not their mastery of any given field, but the
speed at which they zip up a learning curve. They have no baggage or ingrained habits. They’re
naive​ and therefore ​nimble​.

And if you can turn your naivete into an asset, I’d argue you stand a better chance at scaling a
business than any of your competitors. In fact, I believe that no one can truly claim to be a
“master of scale.” I believe we are all, at best, infinite learners.

[THEME MUSIC]

HOFFMAN: ​I’m Reid Hoffman, founder of LinkedIn, investor at Greylock, and your host. I
believe that no one can truly claim to be a master of scale. The most successful scalers are
actually just infinite learners.

This may sound rich coming from the host of “Masters of Scale.” It’s right there in the title. And
in past episodes I’ve called Facebook’s Sheryl Sandberg a “​masterful​ leader” and Google’s Eric
Schmidt a “​master​ of innovation.”

I stand by those assessments — but I would add one caveat. None of us actually reaches a
steady state of mastery. We’re all constantly learning on the job. If Sheryl had ever said, “I’ve
mastered this whole “leadership” thing,” then I would argue that’s the moment her stellar
trajectory would turn south. Infinite learning is a job requirement for scale entrepreneurs.

That’s because almost every scalable idea forces you to grapple with an emerging
phenomenon. Everything around you is changing — your business, your market, your team
— and you can’t turn to any one expert for help — because there ​are​ no experts. And
depending on your personality, you may find that exhilarating or terrifying. Some people have a
fear of the blank page. Barry has precisely the ​opposite​ problem: He’s repelled by the faintest
mark on a page, by anything that’s preordained.

DILLER:​ I think the best thing that you can ever have is a clean piece of paper. You
know? So you've got a clean piece of paper, and in the truest sense of clean. Meaning,
nothing is sacred—you get to just start.

HOFFMAN: ​I wanted to talk to Barry Diller about this, because he embodies the idea of an
infinite learner. You probably know him as a media titan, but you might just be surprised by how
many media conventions he created. He reinvented television networks and then movie studios.
He revolutionized home shopping. Then he bought up a startling number of internet properties.

Today, as chairman and senior executive of Interactive Corp., he owns stakes in travel services,
dating apps, and new media sites. Ever hear of Expedia? That’s his. Ditto for Tinder and
OKCupid. Also, niche dating sites like Plenty of Fish and BlackPeopleMeet — those are Diller
specials. The Daily Beast? Vimeo? CollegeHumor? His, his, his. You can hardly use the internet
these days without encountering one of Diller’s properties.

So how did Barry make the leap from media mogul to internet mogul? That’s a big question that
gets to the very heart of infinite learning. And we’re going to see how Barry made that leap over
the course of two episodes, which also happen to follow the arc of modern media. In this
episode, Barry invents and scales whole new genres of entertainment. Next week, he abandons
everything he learned and refashions himself as the world’s first internet mogul. All the while,
carrying the torch for infinite learners everywhere​.

Barry’s career started in the mail room at the William Morris Agency. You may think you’ve
heard this Hollywood legend before. He works hard. He stands out. He gets some bigwig’s
attention. But that’s not quite how it played out...

DILLER​: I thought I would just soak it up in the hallways, but what I discovered, while all
of the people in the mailroom were basically sucking up to agents so that they could get
to be on their desk, and then—fastest track possible to be an agent.

HOFFMAN: ​Barry, on the other hand, had no interest in becoming a talent agent. And this is
where his story diverges from other fabled Hollywood execs. Barry ignored the ​people​ at William
Morris and focused instead on a neglected little ​file room,​ roughly 30 by 50 feet across.

DILLER:​ And there was this room, and it was the file room. In such days, there were file
rooms with file cabinets and paper. And it literally covered the history of the
entertainment business, because William Morris had been in business since 1898 or
something like that.

And so I spent three years reading from A to Z.

HOFFMAN: ​You heard that right: ​three​ years.

DILLER​: So I got the entire, truly, history of the entertainment business through that
process.

HOFFMAN: ​This didn’t exactly endear Barry to his coworkers.

 DILLER: ​They several times said, "Well, you should leave if you don't want to be an
agent." And I said, "Well, who said that?" And they said, "Well, your body language
seems to indicate it."

A few times, they were thinking of throwing me out. But I did last three years, and it was
my school.

HOFFMAN: ​By the way, Barry actually dropped out of college for this quixotic three-year course
in a filing room. It’s an extreme version of a story I often hear from scale entrepreneurs. They’re
not always full-fledged autodidacts, like Barry, but they always show flashes of independence.
They’re not always suited to school. Sometimes they learn by doing. Sometimes they learn by
reading. Sometimes, like Barry, they go back and forth between the two. And this cycle of
reading and doing tends to accelerate. It may even suck them in, like a vortex. They’ll ask,
“Well, what’s the most important thing for me to learn ​right now? ​ I’ll go learn that.”

Drew Houston, the founding CEO of Dropbox, got sucked into this same kind of reading/doing
vortex while he was still studying at MIT. He told me about it earlier this year.

DREW HOUSTON​: It really started when I worked on my first company called Accolade.
It was doing online SAT prep, and then I realized—it was very clear—that I had
everything down when it came to building the product, or at least the engineering and
getting something basic out to market. But then I realized that I did not know anything
about sales or marketing or financing a company or managing people.

And the list gets pretty long pretty quick, and not a lot of time to learn it. And there was
one summer there where I remember I'd go on Amazon, I'd type in sales marketing
strategy—all these things, all these different topics—and just buy the top one- or two-
rated books, and just crank through them.

Now when I read a book that I think is going to be really influential or really enjoy, I'll
actually write down notes, I'll study it like a textbook.

HOFFMAN:​ And do you still use the reading technique today?

HOUSTON​: Yeah, for sure. I do that a lot. And actually, I make the team do it. Because I
make my leadership team, we pick a book and read it for every leadership team offsite
every quarter, and then a broader kind of top 100 offsite every twice a year.

HOFFMAN: ​One of the top staff picks at Dropbox is a book called “Competing Against Luck”. I’d
tell you to buy it, but if you’re an infinite learner — you probably have your own reading list to
power through – and more power to you.
In any case, Barry Diller emerged from his exceptionally long reading phase, ready to do
something. He didn’t know what, until a friend called him with an irresistible opportunity.

As he describes what happened, I want you to notice how Barry calls out the role of serendipity
in shaping his career. He’ll do that many times in this episode. And he's highlighting not just the
role of luck, but your willingness to be lucky as an entrepreneur. Whenever Barry refers to one
of these serendipitous moments, we will play this sound: ​[chime]

DILLER:​ My closest friend, Marlo Thomas…

VOICE: ​Marlo Thomas is an American actress best known for starring in the TV series
‘That Girl.’

DILLER:​...was dating a young executive at ABC. But everything is serendipity. And he

was moving to Los Angeles from New York, he was kind of up-and-coming, rising little
lower-middle management guy at ABC. And he was coming to LA to be, I think, the vice
president of current West Coast programming.

And he asked me to be his assistant.

HOFFMAN: ​Barry was no more interested in being an assistant than he was in being an agent.
But television was a wide-open opportunity to learn.

DILLER:​ I've always believed whatever you're interested in, get on the widest road, not
the narrowest road. And television was certainly a pretty wide road. And I was fascinated
by all parts, but certainly television, and I said, "Yes."

And then, of course—this is the serendipity of life—which is the day, literally the day that
I left William Morris, they fired the czar of programming at ABC. And they reached out
and they picked my guy to become the head of all programming—running, basically,
ABC.

ABC was the third network, and it was the hip-shooting network. It would try almost
anything. It was also kind of run like a candy store. If you wanted responsibility, you just
took it.

HOFFMAN: ​Barry seized the opportunity to buy movies for ABC. Right off the bat, he was
negotiating movie rights with some of the giants of old Hollywood.

DILLER​: I actually negotiated with Darryl Zanuck, trying to buy the good movies from
Fox, as against the movies he wanted to sell.
 The word "mogul" was invented, was for those guys—the founders, basically, of the
movie business. They were just on their last legs.

HOFFMAN: ​In the midst of these negotiations, Barry was wondering why there was such a stark
divide between TV and movies. Aren’t they all in the business of telling stories? Then he had a
revelation that changed the course of TV history.

It’s the kind of idea you can expect from an infinite learner. Someone who’s spent a lot of time
learning​ everything they can on a topic — and then using it to question everything.

DILLER:​ I started to think: All television at that time were series, either comedies or
dramas, and in both forms, everything was present-day. In other words, those series
would go on for seven years, Lucy still lived in her same apartment. She never moved.
Everything was in present time. There was all middle. There was no beginning, there
was no end. And I thought, "You know what? Why don't we tell stories that have a
beginning, middle, and end?" Like they do in movies. And why shouldn't television do
that?

HOFFMAN:​ There was no shortage of reasons why television shouldn’t do that. And Barry’s
colleagues were quick to rattle them off. For one, the neverending stories on TV shows like I
Love Lucy meant neverending revenue. Why cut a story off, just as audiences are getting to
know and like the characters? Then there were the risks of stand-alone stories with a beginning,
middle, and end: How do you keep costs from ballooning on each original production? You have
to hire new writers, cast new actors, design new sets, and create new promotional campaigns
— and suppose you get every one of those steps right and create a hit. You start from scratch
— and run through that minefield again.

As you’ve probably gathered, starting from scratch is precisely what excited Barry — and
precisely what made industry veterans shudder. Not everyone has this insatiable appetite to
learn. Most people like to work within the tried and true.

So when Barry pitched the idea of a “Movie of the Week” — a movie made specifically for TV —
his colleagues balked. It just wasn’t television. Or so they thought. Remember, Barry, despite
his youth, had studied 75 years of entertainment history.

DILLER​: Years and years before, at the very beginning of television, with things like
Playhouse 90 and Studio One, they did do that, but it went away, and series—filmed
series replaced everything on live television, in any event.

So we came up with this idea of doing the movie of the week, which was putting on a
movie every week. We decided it should be 90 minutes, not two hours, because two
hours was too long an attention span, I thought at the time. And of course, everybody
thought it would fail, because they said, "Well, this isn't television."
HOFFMAN: ​So why was Barry entrusted to launch this wildly new form, the TV movie? He had
a distinct advantage: No one believed his idea could possibly work. And what I find so
interesting about this story is that it explodes the conventional myth of where disruption occurs.

We imagine young entrepreneurs rolling their eyes at the industry’s biggest players and
attacking their businesses from the outside. I often encourage young entrepreneurs to play the
outsider’s advantage. Don’t even bother to join an established company and reinvent... Just
start from scratch. It’s easier. But there are exceptions to that rule.

Equally disruptive ideas can emerge from big, established companies. They come from
innovators embedded within the company. You might call them “intrepreneurs.” They tend to
carve out a little fiefdom for innovation. They sell their fresh ideas across the organization —
winning over colleagues and securing a budget faster than a startup founder can say “angel
investor.”

Alexa Christon is a prime example of one of these “intrepreneurs.” She’s the media innovation
chief at GE. She invents branding campaigns for a company that’s been a household name
since the late 1800s. So how does she find a fresh take on a 125-year-old brand?

ALEXA CHRISTON: ​You can't come in and just, you know, break down walls
destructively. Respect what's been created but don't be afraid to tear it down where it
needs it. And I think that's so vitally important in the way someone who's new in their
career, really should think about their overall mindset and approach to their job. Be
respectful, be empathetic. But don't be afraid to question and to ask, 'Is there a different
way?' And believe it or not, it kind of is that simple.

HOFFMAN: ​Be respectful. Be empathetic. And don’t be afraid to ask: “Is there a better way?”
This could be the manual for intrepreneurs and infinite learners everywhere. Barry embodied
this notion of learning everything and questioning everything. But the “respect” part? That was
perhaps less of his personal playbook.

Barry has no trouble squaring off against his older, more experienced colleagues. I mean, just
listen to him fire off shots at his elders. This is just a sampling of one-liners we pulled from a
90-minute interview.

DILLER:​ He was, first of all, a rotten executive, an endless story I could tell you of
manipulation…

DILLER:​ I couldn’t stand him.

DILLER:​ 20th Century Fox was a dog, a dog, a dog of movie studios. I mean, it was
even worse than Paramount when I got to Paramount,
 DILLER:​ By the way, he was a conman, he was a, boy-oh-man, wildcatter, con man.

HOFFMAN: ​By the way, I’ve never had an interview that had this many feisty quotes on the
cutting room floor. You can hear the full- length interview, in all of its feisty glory, later in the
season.

But you don’t have to be all fire and sharp elbows to change a company from within.
Sometimes, you can find a frictionless path to disruption, simply by drawing no attention to
yourself at all.

And this is what happened to Barry as he pitched his first big idea: The Movie of the Week.

DILLER:​ If actually anybody thought it would work, why in god's name would they give
responsibility to a 23-and-a-half-year-old person? And so this very unique thing
happened, which is I had total control over making these movies, and total control how to
advertise them, which is something nobody ever did on television.

I knew you had to advertise it, because it was different every week. You had to tell
people, in any event. So we started making them, and they went on the air, and they
were just this—from the first hour of the first day—a smash.

And as I say, I gotta do it only because everyone thought it would fail, and they'd get rid
of this fairly aggressive kid in the process.

HOFFMAN:​ And so the TV movie was born. Barry quickly followed that up with another
innovation: The multi-part mini-series. Or, what he then called, the “novel for television.”

DILLER: ​If you want to tell the story of, not a beginning, a middle, and an end play or
script or movie or whatever, but if you want to take it from books, you can't in—much
less 90, you can't do it in two hours.

It needs to breathe more. And so we called it the "novel for television."

HOFFMAN: ​Novels for television — what we now call “Mini-series” — were also an instant
sensation. ABC’s first mini-series “QB-VII” starred Anthony Hopkins and won six Emmys. The
second, “Rich Man, Poor Man,” won four Emmys and four Golden Globes. And before he
moved on — being an infinite learner, you know that’s coming soon — Barry secured the rights
to create the genre-shaping, era-defining miniseries: Roots. This epic eight-part story about
slavery in America smashed every broadcast viewership record in the history of television.
Eighty-five percent of American homes watched at least one of the episodes. To this day — 40
years later — the finale remains the third most-watched TV episode of all time.
Clearly, Barry’s career was taking off. There was just one problem: With each success, the
novelty wore off. Barry was losing interest, fast.

HOFFMAN​: What did that then mean next for you?

DILLER: ​It meant next that I got promoted out of my competence. By the third year, we
had expanded from one night to three nights. We were making 75 movies a year.

And then, started the novels for television. So I was really busy. But by the way, then
another two years or so passed, and I'm not a good steward—meaning I really get
excited through the difficult stuff, and building it, and then when it's kind of there, I'm just
less interested.

HOFFMAN: ​Here, I have to interject and say: I’ve heard this language before. And if you’re a
Masters of Scale listener, so have you. It turns out, a lot of CEOs are infinite learners. And this
means they lose interest fast. Here’s how Nancy Lublin, the CEO of Crisis Text Line, described
it in our Episode “Grit Happens:”

NANCY LUBLIN:​ I'm a wartime CEO. Once things get good and it's peacetime I get
bored and I either want to, like, do something else wild to it or I'll f*** it up because I'm
like no, but we can do blah blah blah. And so I get bored and I move on.

HOFFMAN: ​Nancy sounds an awful lot like Barry.

DILLER:​ I really get excited through the difficult stuff, and building it, and then when it's
kind of there, I'm just less interested.

So I guess the managers of ABC saw that, and they promoted me to run series
television, which was essentially the commodity of television. And I failed. I mean, I didn't
get thrown out, but I was failing, because I truly didn't know how to do that.

If there's no learning, for me, I mean, I'm asleep—literally. And the times in my life when
I've been in that situation, I've been of utterly no value. I've been of absolute negative
value.

HOFFMAN: ​Strengths and weaknesses tend to go together. When infinite learners get bored,
their performance tends to crash. That’s certainly true of me. One of the things I actually have
said about myself is, “I’m a bad employee.” And what that means is if I go to work, and do the
same job, you know, Monday, Tuesday, Wednesday, Thursday, Friday, I kind of don’t care
about my performance. I need to feel challenged, that I’m learning on the job every day.
Otherwise, I tend to lose focus. Barry is even more extreme. The way he puts it, his brain just
ceases to function.
 DILLER: ​By purpose or by temperament, I'm only interested in those things where I
haven't figured it out, and I really do think that however it happened, that when I was
presented endlessly with things I didn't understand, the only thing I could do—because
my brain is slower, and therefore is more literal—and therefore my process is, I have to
get it down to its tiniest particle, or else...I can't come in and understand an equation, if
you can put it in equation terms, unless I de-equation it—I can't pick it up.

So I’m forced - by a lack of brain matter, I am forced to - no I’m not saying it - it's true! To
break it down as hardly low as I can get it, and only then—and that's learning. That’s real
- that is joyous work to me, is getting through those layers, down to something, and then
once I’m down there, once I’m actually at the very, very base of it, I can actually start to
do something good.

HOFFMAN: ​I can totally relate. For example, I was a pretty good employee in one of my earliest
jobs, as a product manager at Fujitsu. But once I understood the technology and knew how to
manage the product team and run through all of those QA checkpoints, I struggled to pay
attention. The way I solved for that is I drank coffee. A lot of coffee.

And if you find yourself drinking a lot of coffee just to stay interested, you better start looking for
the exit. Fortunately for Barry, a well-placed friend once again showed him the way out.

DILLER: ​And again, luck weirdly comes. This time, I'm now 31, 32. And the owner of
Paramount, Gulf and Western—called Charles Bluhdorn, he was this great industrialist
of the '60s and '70s.

And Charlie bought Paramount, and I got to know him because I was this person who
bought movies. And when Charlie bought Paramount, he came to ABC to sell these
movies. And I said, "You made terrible movies, we're not buying your library." He and I
had a really great, fun, contentious relationship. But over five, six, seven years—and he
at various times said to me, "You have to come to Paramount, you should run our
television." And I would say, "No, I'm not doing that. No, no, no."

One day he calls me, and he says, "I want to make you chairman and chief executive of
Paramount." I had zero experience in theatrical motion pictures, and actually, it wasn't
like I said, "Oh, yeah." I thought, "I don't know if I should do it." It wasn't the failing part, it
was I hated every day, so I thought, "Okay, I'll go be chairman of Paramount."

And I did, and that's what happened to me. First I got promoted into incompetence, and
then I went to Paramount, and that was a great challenge—that was new and fresh and
different, and I could be contrarian again.
HOFFMAN: ​Barry’s resume, alone, made him a Hollywood misfit. At 32 years old, he was the
youngest and least experienced executive ever to run a studio. His background in television
gave him a strange perspective on the industry. At that time, TV people did not become movie
people. It was like getting recruited into major league baseball by way of ballroom dancing. He
was right where he wanted to be, an insider, regarding the whole industry as if he were an
outsider.

DILLER​: I was the first person from television to come into the movie business. In later
years, one by one by one by one, almost everybody came from television. Because
television was, first of all, the more creative medium, interestingly enough.
And had much more actual story discipline in certain interesting ways than the tired, old
hoary movie business.

HOFFMAN: ​Barry’s competitive advantage was what he called story discipline. He learned from
his days at ABC that whatever medium you’re working within, you’re essentially in the business
of selling stories — not stars, not flashy productions. Stories.

For Barry, that meant the greenlight process would begin and end with the screenplay. And not
long into his tenure at Paramount, an unusual screenplay landed on his desk. It had no stars
attached to it. And no roles for stars. No big-budget effects. Barry loved it.

DILLER:​ So Stanley Jaffe, a producer, calls me and says, "I have a script for you." I
said, "Fine." He sends it over, and I read it and I say, "This is a delight. We're making
this movie."

HOFFMAN:​ The delightful movie was The Bad New Bears. If you’re too young to remember, it’s
about a little league baseball team that’s godawful. The Bears have a nearsighted pitcher, an
overweight catcher, a chain-smoking, alcoholic coach played by that Master of Scowl, Walter
Matthau. The coach is so desperate to turn this team around, he does the unthinkable. He puts
a girl on the team. Oh yes, a girl. Welcome to the seventies.

Amanda Whurlitzer became the Bears’ new pitcher. And you better believe you’re going to root
for her — and all of the other Bears. It’s a classic underdog story. But there was another
underdog story, playing out behind-the-scenes. Paramount, at the time, was a mess.

DILLER​: There's seven movie companies, Paramount was number seven—made

horrible movies, everything was awful.

HOFFMAN: ​As for Barry, he got about as much respect as Amanda Whurlitzer. He came from
TV, and by his own account, he had no idea what he was doing. But for Barry, and so many
infinite learners, that’s a happy place.
 HOFFMAN:​ So you go to Paramount, which has a terrible movie library, has a bad
position relative to creation of movies. What was your go-in theory about—

DILLER:​ I had none.

HOFFMAN: ​You had none, just like, "OK, I'll do this rather than that?"

DILLER​: No!

HOFFMAN:​ So what’s an out-of-depth young executive to do? Prove everyone wrong, for
starters.

DILLER:​ It wasn't until I got into it and saw how awful it was, how mismanaged it was,
how crazy the process was, that I got excited, because I just thought, there's a whole
other way to do this.

HOFFMAN: ​Barry would eventually turn this troubled movie studio into a hit machine. He would
greenlight films that would change Hollywood. When that Bad News Bears script first landed on
his desk, he simply declared: “We’re making this movie!”

In any other studio, that would trigger a wave of cautionary questions: Who will direct it? Who
will be the star? Slowly, the project will gain momentum as they attached big names to the
project. Barry dismissed all of those decisions as mere packaging. The story came first. It was a
process driven by his own instincts.

DILLER:​ It's great luck if somebody just hands you a script. That's happened probably
10 times in my life, out of thousands of projects.

Anyway, we didn't have a process at Paramount. It took me two years to get this process
together to actually manufacture movies, rather than just depend upon being lucky
enough to have it fall through the transom for you. We had one good movie, and then all
of these turkeys, and then slowly, we're getting it right. Saturday Night Fever, Grease, to
Raiders, et cetera.

HOFFMAN:​ Allow me to interject, here, with a few other movies from Paramount Pictures' glory
days. They released: “The Warriors”, “Beverly Hills Cop”, “Star Trek the Wrath of Khan and the
Search for Spock”, “Friday the 13th”, “Airplane”, “The Elephant Man”, “Flash Dance”,
“Footloose”, “Trading Places”, “Top Gun”, and “Crocodile Dundee”.

DILLER: ​For the next seven years, we were number one in the movie business. And it
was because we picked our own path.
HOFFMAN: ​I want to dig a bit deeper into this notion of building a process around your instincts.
On the one hand, it sounds like there isn’t much of a process to Barry’s work. He sees a script.
He likes it. Boom, there’s your movie.

On the other hand, he has to scale those instincts across the organization. You have to go from
“I know it when I see it,” to “I know it, I see it, and I can teach you to see it too.” And that’s when
Barry gets to his favorite part of the learning curve — defining a process that seems almost
impossible to define. Barry said something you’ll almost never hear in the freewheeling “move
fast and break things,” culture of Silicon Valley.

DILLER:​ I love process.

HOFFMAN: ​I had to ask him about this.

HOFFMAN: ​This may be one of the things that's an interesting difference between early
stage Silicon Valley companies and the importance of a good product in media. But
process is normally a bad word here in Silicon Valley. What do you mean by process?

DILLER:​ I mean, I like an iterative process.

HOFFMAN: ​So, learning.

DILLER: ​Yeah, we talked about it. But I have one of my closest friends, who has great,
great wealth. He can't stand process. Whenever something has happened with one of
the companies I've been involved in, he would say, "Sell it."

And I say, "What do you mean, sell it?" He said, "Sell it. He said “Sell it. Once it's this,
sell it." It's like a dagger to my heart, and I am the opposite of that. I like the period from
here, when it is either a mess or it is brand new, to here, when it's been realized in one
form or the other.

That process and all the things that that means which is making mistakes, course
correcting to this, doing that at all—that gutsiness I love. And that, to me, that is process.

HOFFMAN: ​What I realized in the interview is that when Barry uses the word “process” he
means it differently than the way we say it in Silicon Valley. In my circles, "process" means
"bureaucracy." To Barry, process means ... everything we talk about on this show - the ideation
and pivots and learning and growth that allows a company or idea to come into the world. You
can pick pretty much any point in Barry’s varied career as a media mogul to see this mysterious
process in motion.

But I think one of the most telling examples is the moment he made the leap from movies, back
into television. Barry had this crazy idea of launching a new television network. An idea that
makes inventing the TV movie look like pocket change. The big three networks — NBC, ABC
and CBS — had dominated media since the invention of television. Keep in mind, this is the
mid-eighties — the early days of cable TV, and long before YouTube or Netflix.

The presumption was that the three networks had a lock-in, especially on primetime TV. What
evidence did Barry have that viewers were pining for something…different? He had no evidence
— aside from his own instincts.

He didn’t even intend to pitch the idea. But a passing comment caught the interest of a
heavyweight gambler, the media mogul, Rupert Murdoch.

DILLER:​ I said, "Look. I've always had this thing of starting a fourth network, which
everyone of course thinks is crazy."

And he said, "That's great, let's do it." I said, "Well, huh—what?" And he said, "That
would be great." And not even on half that page, I scribbled down some numbers of what
I thought it would cost.

And on that basis, Rupert Murdoch borrowed a billion-and-a-half dollars, he bought the
Metromedia television stations, and 18 months later, we started Fox Broadcasting.

HOFFMAN: ​So they make a billion-and-a-half dollar bet on a new network, Fox. And
incidentally, Fox was not known for any political viewpoint in those days. It was a brand-new TV
network that had no founding vision, other than that it wasn’t ABC, NBC, or CBS. It would be the
“alternative” network. Which raised a question for Barry.

DILLER: ​What does “alternative” actually mean?

HOFFMAN:​ As Barry was thinking about this idea of being “alternative,” a project hits his desk
that brought this idea completely into focus. Once again, the word serendipity comes to mind.

DILLER: ​One day, a project comes into Fox, and it's called “Not the Cosbys.” Now at
that time, Bill Cosby was the biggest star—had the most successful program on
television. Bill Cosby, who we now think of otherwise.

He was the number-one show on NBC. This was a series about a family as against this
Huxtable family of perfectness—this was a really rotten-y, noisy, unpleasant family,
which became Married With Children.

HOFFMAN: ​So here’s where the process begins. He finds a counterpoint to conventional
wisdom: Let the other networks have their sweet smug family shows. He’ll make ”Married With
Children.” And now he wants to bring more of those irreverent, noisy shows to the market.
 DILLER:​ And it was as alternative… You couldn't be more alternative, and it was our
first big success. That was the vein. And I've always believed, when you find a vein,
thicken it any way you can.

HOFFMAN: ​This, of course, is where The Simpsons came in. And you might think after
greenlighting The Simpsons, Barry could greenlight any show he’d like. On the contrary: He
fights. He fights. He fights, he fights, he fights.

He fights to create a signature style that no other network can imitate. An infinite learner will
never look at a competitor and say, “Let’s hedge our bets and copy that.” They’ll break down
what worked — the warm family sitcom — and take a hard turn in a new direction — the rotten,
noisy, irreverent family sitcom. And with each hit, they create the taste by which they’re relished.
And anything short of that, in Barry’s opinion, isn’t worth trying.

DILLER:​ The principle, to me, is you can't cheat that.

Everybody tries. I think in that, there are no shortcuts. And I think that also, the principle
that is tied to that is: Exhaustion is when creativity starts. If you put people in a room, you
take them past their endurance level.

That could come in the third hour, or the 24th hour, or 15th, or whatever. But it does
come. That moment—which is what I think is breaking, again, it down and down and
down—is the beginning of something that's of value.

And I think it's very important to recognize, you can't relax in it, because it's frustrating.
Time is very frustrating. But to at least have some equanimity about that. And it took us a
while to find out something that seems so obvious.

HOFFMAN: ​A “fourth network,” so obvious — and given that the average household can now
flip through 190 channels — it was a rather long overdue idea, when you think about it. There’s
just one problem for Barry. Once an idea seems rather obviously good, guess what — he gets
bored again. Only this time he wasn’t just bored with his job. He was bored with the entire
business of storytelling.

DILLER:​ I decide after eight years at Fox that I've now been running movie companies
for 18 years, television companies, and if I never saw another script, I'd be a happy
person.

HOFFMAN: ​Think about what Barry is saying here. If there’s one thing he knows at this point in
his career, it’s how to spot a good script — he can scale a whole media empire from that finely
honed instinct. And yet, here he is, at the height of his career, saying he never wants to see
another script again.
I know a lot of serial entrepreneurs who seek out fresh challenges, but usually within an
adjacent industry. If you look at the arc of my career — from building an online dating site to
PayPal to LinkedIn — you’ll see that I have a particular fascination with network effects. How
can I create an online network for dating, payments, or jobs that adds value with the addition of
each individual user? Networking in the digital age is just my thing.

Barry, on the other hand, is ready to take a leap into a wildly new field, which means he will also
have to tackle a new learning curve that few entrepreneurs survive. For the first time, he
witnesses a user interacting with a screen — not just passively viewing content – but engaging
with content, shaping the content. He’s transfixed.

DILLER: ​Can you imagine how exciting it is to go from understanding the screen and
being—probably a lot of other people understand narrative and screens, but god knows I
did—to go into, "Huh?"

HOFFMAN: ​Yes. Well, it's the blank page.

DILLER: ​Absolutely.

HOFFMAN: ​Right. A new blank page.

DILLER: ​Oh my god—the blankest of blank page.

HOFFMAN: ​So what was this incredible user experience that would force Barry to question
everything he’s learned? And can he really fill this blankest of blank pages with a sensible plan?

He’s an infinite learner. He has no choice but to try. And we’ll see how he does it next week, on
Masters of Scale.

I’m Reid Hoffman, thank you for listening.

Masters of Scale Episode Transcript: Barry Diller (Part Two)

BARRY DILLER:​​ I've now been running movie companies for 18 years, and if I never
saw another script, I'd be a happy person.

REID HOFFMAN: ​That’s Barry Diller, Former CEO of Paramount Pictures, founder of Fox
Broadcasting, creator of the first TV movies and miniseries. At the height of his career, when
another executive would be riding high on their success, he was bored. Not just with his job —
but the entire business of storytelling.

And this is a startling twist. Barry saying, “I’m done with scripts” is like my friend Elon Musk
saying, “I’m done with electric cars.”

In his boredom, Barry was searching for a new idea. Any new idea. Anything other than he what
he had been doing for the past 18 years.

DILLER:​​ I had quit, and said, "I don't know what I'm going to do, but I'm going to drive
around the country." To basically stop having meetings with people who wanted me to
do the same old thing.

HOFFMAN: ​So Barry literally hit the road in search of a new career. And that’s how he ended
up here:

MAN’S VOICE: ​Have you ever wanted to listen to the radio...in the shower? Well now
you can!

WOMAN’S VOICE: ​Ever wonder if your babysitter’s actually feeding vegetables to those
kids?

MAN’S VOICE: ​Constantly.

WOMAN’S VOICE: ​It’s the teddy bear nanny-cam!

MAN’S VOICE: ​Fantastic.

WOMAN’S VOICE: ​We have one at home and we love it.

MAN’S VOICE: ​Call now.

HOFFMAN: ​Yes, it’s QVC. That’s right, QVC — you know, the home shopping network where
you can hop on the phone to buy a handbag or a Sterling Silver necklace — but for a limited
time only.
 MAN’S VOICE: ​Act now, ’cause they’re going fast.

DILLER:​​ What happened was that my wife, who's a fashion designer—Diane von
Furstenberg—she had gone to this new thing called QVC. And she said to me that I
must go see it.

HOFFMAN: ​Barry wasn’t exactly captivated. But he was curious.

DILLER:​​ And so I went to QVC, and I saw something that I had never seen before. It
was this early convergence of telephones, televisions, and computers. But the most
important thing was, I had only known about screens to tell stories. Here, I saw a screen
that was interactive.

That screen was used for purposes other than narrative, and that was — wow! That
whacked me.

HOFFMAN: ​This is what amazes me about Barry. He’s imagining an age of interactive content
back in 1992, when the internet barely existed. No one could even begin to imagine the kinds of
content that would emerge as people learn to interact through their screen. And his lack of
knowledge — in fact, his complete confusion — is what sold him on it.

DILLER:​​ Can you imagine how exciting it is to go from — I mean, a lot of other people
understand narrative and screens, but God knows I did—to go into, "Huh?"

HOFFMAN:​​ Yes. Well, it's the blank page, right?.

DILLER:​​ Absolutely.

HOFFMAN:​​ Right. A new blank page.

DILLER:​​ Oh my god—the blankest of blank page.

HOFFMAN: ​The blankest of blank pages may not sound like much of a plan — but if you’ve
heard last week’s episode, you’ll understand why Barry latched onto it. Barry is what I call an
“infinite learner.” If he isn’t learning on the job, he simply can’t do his job. Listen to last week’s
episode to get a sense of the radically new ideas he scaled across the entertainment industry.

I know plenty of entrepreneurs who are veritable mountaineers when it comes to climbing a
steep new learning curve. But Barry is in a class of his own. He doesn’t just learn fast. He knows
how to unlearn. And that’s an essential skill for a career as varied as his. If you want to be a
serial entrepreneur, you have to learn how to unlearn.
[THEME MUSIC]

I’m Reid Hoffman, co-founder of LinkedIn, investor at Greylock and your host. And I believe the
essential skill set of a serial entrepreneur comes down to a simple habit: You have to learn to
unlearn.

People tend to take pleasure in their mastery of a given field. They go, “I’ve learned this, and
now this is what will differentiate me from other people for all time.”

One of the things that I tell people is that success imprints more strongly than failure. And it
does so because as you’ve succeeded, it’s like, I’ve learned this tool. And so, this tool must be
right. And so, I just keep applying it, and even as the train comes off the tracks, because part of
what happens is, you know, markets change, competitors change, industries change. You
change.

And so, frequently, you have to go, “Okay, which of the old lessons have to be thrown out? And
which things do I have to unlearn or learn anew?” To unlearn, you have to let go of what you
thought was true. And to purge the core that made you successful is very hard to do.

For example, if I tried to go start a new consumer internet company, and I tried to do that the
way that I started LinkedIn, and just kind of said, “I’m gonna follow the early LinkedIn playbook,”
I’ll fail. Mobile is different. Virality is different. LinkedIn and the ecosystem is different. The
platforms that people are using, they’re all different. So you have to use a different set of
techniques in order to do this. And that’s part of the learning and unlearning.

So Barry, in his eagerness to unlearn everything he’s learned about media, buys up QVC —
and stakes out his first venture in the wild new world of interactive content.

QVC was just a testing ground for a much grander ambition. Barry was mesmerized by the idea
of an interactive screen. He saw how it could shake up any and all industries. And he was about
to build an empire of interactive content. Then, in 1995, he acquired a company called Silver
King communications, which after a series of name changes became InteractiveCorp, or IAC for
short. The name is generic by design.

HOFFMAN: ​And so what was the genesis and idea of doing Interactive Corp?

DILLER: ​I am the definition of unintended consequences, I guess. From the world I

came from, of narrative, I’d gotten this dose of interactivity.

A word I made up, by the way. It was there for the taking.
 The word "entrepreneur" had now really begun, very early stages, but it had begun. And
ideas of colonizing offline businesses into online businesses—that had just begun. So
we were there very early.

HOFFMAN: ​One of IAC’s first major acquisitions was a company called Ticketmaster — which
became the leading online hub for tickets to concerts, games, and other live events. And then
see if you can follow the thread here — what does he acquire next?

DILLER:​​ Ticketmaster was one, and then of course travel—

HOFFMAN: ​Expedia.

HOFFMAN: ​That’s right, he buys Expedia.com, and moves into online travel. And if that sounds
like a rather odd leap, watch him put the moves on online dating.

HOFFMAN: ​How did you become literally the king of dating?

DILLER: ​It's the truth. My son says to me, "There's a site you should buy." I said,
"What?" "It's called Friendster. Friend Finder." Something like that.

HOFFMAN: ​Friend Finder, that's the one you're thinking of.

DILLER: ​So I look it up, I say, "Alex, this is a hooker site in Canada." I said, "No, we're
not doing that."

However, the idea—so there was a tiny little company in Texas called Match.com
because I'd said, "This is something the internet can do." So we bought this little tiny
thing, and then it went to where it went.

I had thought that there was no reason why, if you built up some fluency in this, you
couldn't do lots. So we became, very quickly, the only conglomerate, so to speak, in the
internet space.

HOFFMAN: ​Match.com went on to become the first mega-dating site. But Barry doesn’t stop
there. He leans into the entire genre of online matchmaking and beyond. We ran through the
list in our last episode, but it’s worth recounting here.

Match.com.
Tinder.
OKCupid.
Plenty of Fish.
BlackPeopleMeet.
Expedia.
TripAdvisor.
UrbanSpoon.
Vimeo.
Ask.com
The Daily Beast.
College Humor.
Daily Burn
Dictionary.com
Angie’s List

You can hardly use the internet without encountering one of Diller’s properties.

The question remains: If every online property is fair game, how does Barry even decide what
IAC should buy in the first place — and which he should avoid? I asked him, and expected a
guiding philosophy that would at last explain IAC’s ever-expanding portfolio.

HOFFMAN:​​ So how did you apply your blank page, your process, to the starting of your
Internet businesses?

DILLER:​​ The first one is always the first, and then since I'm always up for anything, I
really want to keep scrubbing it so that I'm open. But by the fourth or fifth, I said,
"Yes—this is what we do.” In a world where nobody really knew anything—I always think
nobody knows anything about anything, including me. But where very few people knew
anything, we had actually built up some expertise in knowing some of the basics of both
product iteration and distribution.

And so it was very natural. We started businesses, we invented them, we bought them at
various stages, and we got used to it.

HOFFMAN: ​This is a high-stakes game, buying companies and figuring out how they work as
you go. You can imagine how this portfolio might collapse in a cloud of mismanagement. But
Barry, once again, has a competitive advantage: He may be a novice in all of these fields, but
so is everyone else. Remember this line?

DILLER:​​ I always think nobody knows anything about anything, including me.

HOFFMAN: ​There’s a lot of wisdom packed into that statement. First, he knows that so long as
no one has figured out how to run these businesses, he has as good a shot as anyone.

Second, he knows what he doesn’t know. And this helps you to continually embody a beginner’s
mindset — where you’re curious, nimble and open to new ideas.
And finally, he has the confidence of a lifelong learner — and this sort of confidence can’t be
faked. You can’t just declare yourself an infinite learner. You have to do the hard work of both
deep learning — and quick unlearning — before you can place bets on so many industries. If
you go in with too many preconceived notions about how a business should run — it’s a liability.

DILLER​​: The more you know, the worse it is. In fact, it's relatively simple—is it a good
idea?

When an existing company—an acquisition—if you spent too much time on it, and you
learn too much about it, you will inevitably be talked out of it. And I've seen it happen so
many times in my company,

Hindsight is hindsight—but you go back a year or two later and say, "What was wrong?"
You know, we've got teams of analysts and—same thing you've got. And you get too
much data in that, as against a good idea, and you come to the wrong conclusion.

HOFFMAN:​​ This reminded me of my own investments in the “venture” stage, when we take big
risks on much less mature companies than Barry. We also have our analysts and due diligence
teams Combine that with our own near death experiences as startup founders, and it’s a wonder
we invest at all. But remember: We’re not just infinite learners ourselves, we’re in the business
of investing in other infinite learners — people whom we entrust to work through all of those
troubling unknowns. So we learn all of the risks to the business, and then we unlearn them.

HOFFMAN:​​ By the way, there's a funny parallel to the venture business, because
basically, if you can completely predict it analytically, it's probably at the wrong stage for
the venture business. So that means is, that you're taking a risk; you're jumping into the
unknown somewhat. And if you overly pollute it with, "Here's a risk, and here's an
unknown, and here's a risk, and here's an unknown, and here's a risk, and here's an
unknown," then all of a sudden, it just looks like, "Oh my god, how could this ever work?"

So you want this balance between, "I know what the big risks are, I know what the big
play is, but I can still see the vision that it could be." That's the fulcrum by which you
want to make decisions.

DILLER: ​We’re not, as you know, we're not in the venture stage in the acquisition area.
We're at stages where, at a minimum, you're paying $500 million to multiple billions for
something. Well, forget the valuation game, which is a whole other shell game.​ ​The killer
of over analysis, is the loss of opportunity. And that's really true.

HOFFMAN: ​Because it's the opportunity is what matters much more than anything else.

DILLER: ​Absolutely.
 HOFFMAN: ​Yes.

HOFFMAN: ​One quick way out of this analysis paralysis is to start from Barry’s premise that
nobody knows anything, yourself included. And this is simultaneously a humbling and liberating
concept.

A lot of young entrepreneurs think strategy is something like a chess game. They think they
have to pre-plan the whole sequence of moves — and actually, in fact, sometimes, you get
elements of that. But frequently, what I tell founders is, “No, you actually don’t need to plot out
every move in your head. In fact, you shouldn’t. Just stay nimble enough so that when you see
a strategic opportunity, you recognize it and you orient towards it.”

The most visionary founders recognize the limits of their vision. They can picture in vivid detail
what their customers want. But they also recognize that that picture was painted by their
overly-active imaginations. They have to readily revise this imagined future, based on the reality
of customer feedback. You can’t get that feedback by simply describing the future to your
customers. If you were to ask them, “Hey, would you want this?” The usual answer is a sort of
lukewarm, “Possibly, I don’t know.” You don’t get very good data, because most people are not
good at conceptualizing the future.

But if you give customers a glimpse of that future — which means building and rebuilding your
product — what typically happens is, customer kind of knows it when they see it, right? At some
point, they’ll go, “Ooh, that’s good.” And only then does the next step in your strategy become
apparent.

What I find so interesting about Barry’s business model is that the moment he becomes
sure-footed in his strategy, that’s the moment his interest starts to wane. He has no interest in
clinging to familiar properties, or even the ones that anchor IAC’s portfolio.

DILLER:​​ And then I thought, this is stupid. I don't like conglomerates. They're inefficient,
and essentially you are the false daddy to all of these enterprises—meaning "false,"
meaning, you have total control, you can allocate capital here, there and whatever. They
come to you as the daddy but you're allocating capital rather than this company doing
what it solely wants to do.

So I started spinning these companies off, as soon as it got to be a stage where I

thought it really needed the light of being independent, being on its own. That was a
healthy thing.

HOFFMAN: ​Here’s what makes IAC such a strange and indescribable business. Everything
Barry learned about online dating, travel or new media, he’s ready to spin off as soon as he’s
figured it out. In 2008 alone, IAC spun off the Home Shopping Network, Ticketmaster, and
LendingTree.com.
IAC, in short, is not quite a conglomerate — though it’s often mistaken for one. It’s more like an
incubator that hatches ideas for just about the length of time that Barry can sustain his interest.
It’s a portfolio constantly poised between Barry’s desire to learn and unlearn.

DILLER: ​ So we've done nine spinoffs of companies, because—now we keep an

incubator company, called IAC, if something gets to be of size, we spin it out.

HOFFMAN: ​I want to be clear, no one can build and manage this diverse of a portfolio on their
own. Barry doesn’t just spot promising companies — he spots promising leaders. They are
infinite learners, like himself. They’re known as ”the Killer Dillers.” They include entertainment
executives like Jeffrey Katzenberg, former CEO of Dreamworks, Dawn Steel, the former head of
Columbia Pictures and Michael Eisner, former CEO of the Walt Disney Company.

They also include high-tech executives. When Uber forced its co-founder and CEO, Travis
Kalanick, to step down, who did the board hire to turn the company around? That’s right, a Killer
Diller, Dara Khosrowshahi, Uber’s new CEO.

And that’s just a sampling of the talent that flies like sparks out of Barry’s companies and sets
whole industries ablaze. He has an uncanny ability to develop future leaders, according to a
simple rule.

DILLER:​​ Here it is, in a sentence, whether it's dumb or smart. Which is, if you hire
people at senior positions, you are a failure.

HOFFMAN: ​This wasn’t what I expected Barry to say. He explains.

DILLER: ​It's my own stuff, I got hired with no experience, no nothing, somebody just
took the flyer, as they say.

So I have always believed to hire people, bring people into your organization who are
young, and who are inexperienced for the job that you give them. And sometimes that
works, and sometimes that doesn't work.

HOFFMAN: ​You won’t find the following recommendations in any HR manual.

DILLER: ​When you drop somebody into deep water, and you see they flounder, and
they really are gasping—unless that happens, development rarely happens. And then
slowly they get above the waterline, and then they start to go.

HOFFMAN: ​If you think Barry is exaggerating, consider his training regimen for one of the Killer
Dillers.
Uber’s CEO Dara Khosrowshahi.

DILLER:​​ Dara Khosrowshahi started with our company, was at Allen and Company as a
junior analyst, he came to us as a junior analyst. What we did is we made him CFO—he
had no experience, he didn't know what a CFO was—of a division, and he just kept
going from there.

DARA KHOSROWSHAHI: ​And Barry is absolutely right, I had no idea what I was
taking on.

HOFFMAN: ​That’s Dara, by the way.

KHOSROWSHAHI​​:​ I didn't know how to work with an audit committee. My

accounting expertise was quite lacking but Barry has a habit of throwing people kind
of into opportunities and letting them either rise or fail.

HOFFMAN: ​You’d think Dara might have flagged some of these gaps in his resume. Think
again.

KHOSROWSHAHI: ​You know, we were moving so fast that there wasn't much time for
self-reflection. I was just lucky that Barry gave me that opportunity. So, no, you know I
didn't think long and hard about it, when you get an opportunity like that you say, yep,
and you figure it out.

HOFFMAN: ​Now that’s an infinite learner talking, and here’s what happens when an infinite
learner swings into action.

KHOSROWSHAHI​​:​ We were essentially a conglomerate with lots of little

independent businesses out there. And to build out the controls to be a proper
reporting public company was a real struggle for me. Fortunately, I knew what I didn't
know and I have for example a great audit committee chair, Alan Spoon, I had a
terrific mentor, Victor Kaufman, who I went to for help.​ It was a really positive
experience in the end, I mean it was a tough fight but it’s tough fights that are satisfying,

HOFFMAN: ​A pretty positive experience — but here’s the thing about infinite learning — it’s
addictive. When Barry was searching for a new CEO to run Expedia, Dara hurled himself into
the deep end.

KHOSROWSHAHI:​​ So the CEO kind of decided that he was going to move on to his
next challenge and at that point I was CFO of IAC and I raised my hand and I asked for
the CEO job, not understanding exactly what it would take and Barry, in that case, took
me up on the offer. It was either because he thought I was talented or he didn't have
 many other alternatives and I kind of don't care why. But he gave me the opportunity and
you know, in that job, for the first year or year and a half, I had a tough time but I learned
what it took, Barry did give me the time, he allowed me to make some mistakes, some of
them were painful and after that tough year, year and a half, things started turning in the
right direction, and I was Expedia CEO for 13 years which led me to where I am now, at
Uber.

HOFFMAN: ​So by now, you’re probably getting a sense of why Dara was tapped to run Uber.
Perhaps the only thing more compelling than his experience, is how quickly he learns in the
absence of experience. He’s back in the deep—and he’s right where he belongs.

KHOSROWSHAHI:​​ Oh I am very much in the deep end, but you know, I knew that I was
getting into a super dynamic, super difficult situation and the experience that I had at a
CFO of IAC and CEO Expedia has really taught me to find the hard stuff and take the
hard stuff on early because the hard stuff doesn't get any easier with time, it only gets
tougher.

HOFFMAN: ​We’re scheduling an interview with Dara for an upcoming episode of Masters of
Scale. So if you want to hear what he’s learning and unlearning, stay tuned. And send us any
questions you have for him @mastersofscale.

So far we’ve focused on Barry’s most successful proteges. But there’s also the untold story of
the bright young things who were thrown into the deep end — and sank. Barry acknowledges
the risks. He doesn’t fret over them, though.

DILLER:​​ If you do it with consistent turkeys, then you just have a swimming pool with
dead bodies at the bottom.

HOFFMAN: ​Let’s linger for a moment on those bodies at the bottom of the pool. The Killer
Dillers themselves had a bit more to say about this problem.

KHOSROWSHAHI​​:​ I try to throw them into the shallow end so they don't, and see
how they swim before I transfer them over to the deep end. You know, I'm younger
and maybe I'm not as brave a risk-taker as Barry is.

HOFFMAN: ​Barry can develop new talent the same way he develops new businesses — with
an open mind, a quick reaction time and no fixed assumptions. Dara adds that he’s never seen
anyone read his employees quite as closely as Barry.

KHOSROWSHAHI​​ Barry listens unlike anyone I've ever met. He's really listening for
every single angle. He wants to get his data straight from the source, he wants high
fidelity, he does not want any editorial whatsoever, you know he has an ear for
 human nature and kind of business in a way that I haven't seen other people but that
listening skill I think allows him to identify traits in people that a lot of other people
who aren't listening this carefully or observing this carefully I think, miss.

HOFFMAN: ​This ability to read your colleagues — to learn and unlearn everything you know
about them — is perhaps the single most unpredictable variable in your business. Markets
change, technologies change, user habits change — but nothing changes as wildly as the
talents of your employees.

Margaret Heffernan, the former CEO of five tech companies and author of Dare to Disagree,
argues that the best leaders don’t even try to gauge talent as some fixed quantity inherent in
every person. People rise and fall, depending on the circumstances. True leaders constantly
study their employees for signs of promise and signs of trouble.

MARGARET HEFFERNAN:​​ We make a huge mistake when we divide people into kind
of stars and also-rans, which culturally, we tend to do. He/she is a superstar. They’re a
good foot soldier. I think in some circumstances, anybody is a star, and in some
circumstances, anybody is a foot soldier. And it is very like casting, which is there are
certain actors who are just the most dazzling supporting actors. If you put them in the
right position, they will change the whole movie. They don’t need to run it to change it.
And there are other—and those same people can also be stars in a different film.

And so, this idea that there are people who are infallible—even Jeffrey Katzenberg isn’t
infallible. Even Barry Diller isn’t infallible. Steven Spielberg has made stinkers, and Steve
Jobs has run bad companies. So, the important thing isn’t are you in the superstar
category or the footsoldier category.

The point is, are you the right person for this job assignment? And that’s a higher grade
of sensibility, it seems to me.

HOFFMAN: ​Even Barry’s uncommon ability to spot the right employee for the right job, leaves
him vulnerable to one final and unavoidable challenge: How do you hang onto those employees
who thrive in the deep end?

The hard truth is, you often can’t. When Barry loses a powerhouse talent like Dara to Uber, take
note of his reaction. He emailed an open letter to every employee at Expedia. One line, in
particular, struck me:

It reads: “If Dara does leave us, it will be to my great regret but also my blessing”

That is how you learn to let go of your talent. I couldn’t resist telling Barry. In fact, I had a bit
more to say about the letter than he did.
 HOFFMAN:​​ The letter that you had written about him in the shift to the Uber CEO job,
because obviously he was formerly CEO of Expedia with you, was actually, in fact, a
textbook letter in something that—my second book is called The Alliance, which is, how
do you actually make allies out of the people you work with for career transformation?

That was the perfect—look, we love you, we love you working here, you've done
amazing things, and it's great that you're also—we'll miss you, but it's also great that
you're going to go do something else amazing as well. Right?

And was that the same way that, all the way back to the Paramount days, about how you
were essentially developing talent?

DILLER: ​Absolutely, yes.

HOFFMAN: ​You can read the full letter on our website at Masters of Scale.com.

In light of everything Barry has learned across his varied career, I had to ask him one last
question. It’s a question I ask every guest.

HOFFMAN: ​Is there anything that you would call and tell your younger self, do X
differently, or do more of Y, less of Z?

DILLER:​​ Endless. Because, as I say, the process is learning and

course-correcting—other than academically—when it's process towards commerce or
whatever. And so it wouldn't matter, because yes—I would tell myself 27 million different
things, it wouldn't do me or it any good, because for me, I had to unlearn to learn.

Learn to unlearn, and the whole circle of that.

HOFFMAN: ​That's an awesome expression have you said that before?

DILLER: ​No.

HOFFMAN: ​I haven't heard that, that's great.

DILLER: ​I've never thought it before.

HOFFMAN: ​I HAD thought it before. But I never quite found the words for it, until I interviewed
Barry. You learn something new every day. And then, of course, you unlearn it.

I’m Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Tim Ferriss

REID HOFFMAN: ​I’m Reid Hoffman and you’re listening to Masters of Scale. What
follows is a special episode of the Tim Ferriss show that we produced with him. For
those of you who aren’t familiar with Tim, he shot to fame with his book, The 4-Hour
Workweek. And he’s an accomplished speaker who has given multiple TED talks. He
also has a terrific podcast.

Tim studies the lives of high performing people and distills their practices and
perspectives down to actionable lessons you can use in your own life and business. I’ve
known Tim for years and have always been impressed by the caliber of the audience
who faithfully listen to his show. For his audience and for you, we’ve created a special
remix of Masters of Scale Season One, including a lot of previously unpublished
recordings. It’s the 10 commandments of startup success. I hope you enjoy it and
perhaps even go subscribe to Tim’s podcast as well on Apple podcasts, Stitcher, or
wherever you listen.

Again, his podcast is The Tim Ferriss Show and you can read more at Tim Ferriss’ blog
at tim.blog.

[Theme Music]

TIM FERRISS​​: Commandment number one: expect rejection. But learn from every
single “no.” ​As a founder you have to be resilient, you have to learn to weather rejection
as it is a universal experience. And this clip that you’re about to hear brings that to life in
full color.

KATHRYN MINSHEW​​: I had been turned down 148 times.

HOFFMAN​​: That’s Kathryn Minshew, co-founder and CEO of The Muse, a career
development website that she pitched to investors 148 times—not that she was
counting.

MINSHEW​​: There were literally days where I had a “no” over breakfast, and “no”
over a 10:30 AM coffee, a “no” over lunch. Disinterest at 2:00 PM, somebody
who left a meeting early at 4:00. And then I would go to drinks and feel like I was
being laughed out of the room.

And when we finally raised our seed round, I went back and counted. It was both
painful and gratifying at the same time, looking at all those names, and thinking,
“I remember that ‘no,’ I remember that ‘no,’ I remember that ‘no’”—and they sting;
every one stings.
 HOFFMAN​​: Today, the Muse serves users in the millions. Kathryn raised $16
million last year—and her tale is the origin story of most great startups. So, if
you’re hearing a chorus of no’s, you should look for other signs that you’re onto
something. I believe that the best ideas often appear laughable at first glance.

FERRISS​​: ​Most entrepreneurs hear a chorus of no’s as they get started and you have to
expect it. In fact, it’s not just when you get started. Because in the beginning it could be
a handful of perspective customers, then it’s venture capitalists, then it is maybe even
private equity folks, and then investment bankers, and so on and so forth, potential
suitors, and it goes on and on and on. So, you have to expect it and you have to
condition yourself to deal with it.

Reid says that these no’s can actually be a very good thing. And particularly in the
beginning, you don’t WANT everyone to say yes. And here’s why:

HOFFMAN:​​ The first truth of entrepreneurship and investing is that the very big
ideas are contrarian, because the contrarian is part of the reason why a bunch of
large companies and competitors haven't already done it, why a bunch of other
entrepreneurs haven't already succeeded at it. And so that leaves the space for
the creation of something—and to create something big, you have to have that
initial space. For example, in the early stages of Google, search was a terrible
way of making money in advertising, because advertising is time-on-site. And
what does search do? It shuffles you off the site as fast as you can go. That’s not
a good business model. So at Airbnb it’s like, “Someone’s going to rent a couch
or a room from someone else? Who are the freaks on both sides of that
transaction?” So all of these things have a similar quality—very smart people will
tell you, there’s no there, there.

FERRIS​​: ​So it can be a good thing to hear a lot of no’s, to get those rejections. But
sometimes, your bad idea is just a bad idea. So how do you tell the two types of
feedback apart? Or put it a different way: how do you interpret the no’s?

Reid has a great way of describing the kind of “no” that you do want. Apparently, you
want a, what he would call a “squirmy” no. And Reid explains this with the help from
Tristan Walker. Tristan’s company produces the Bevel razor, which is designed for men
with coarse and curly hair.

HOFFMAN:​​ So how can you tell a ​truly​ bad idea from a bad-sounding idea? How
can you be sure ​your​ ugly duckling could become a swan? This is the key: You
have to pay attention to the quality, not the quantity of rejections. You want to see
at least a teeny minority of investors ​squirm​. You don’t have to get them to a
“yes,” but you should detect some friction, as they reason their way to a “no.”
Tristan has a keen ear for this quality in his conversations. He can pinpoint, down
to the PowerPoint slide number, the moment his audience stops paying attention.

TRISTAN WALKER: ​I had a slide in there—I think it was like slide 14—where I
talked about Proactiv—the acne system—as a good analogy to what we're trying
to do. It's the difference between Gillette and Bevel, as Neutrogena and
ProActiv—it's a system that solves a very important issue. And this VC looked at
me—and I'll never forget this—he said, “Tristan, I'm not sure issues related to
razor bumps, shaving or irritation are as profound and big an issue for people as
acne.”

At which point, I said, “I kind of understand what you're saying, but all you had to
do was get on the phone with 10 black men, and eight of them would have said,
‘This is a permanent thing I have to deal with.’ All you had to do is get on the
phone with 10 white men, four of them would have said the same thing. Could
have done it for women too, and you would get the same ratios.” So it wasn't that
it was a bad idea, or not as important—it's just that that person was unwilling to
acquire the context necessary to understand what we're working on. That's just
laziness—and at that point, I can't fix that. So I just gotta move on until I find
somebody who understood it.

HOFFMAN:​​ Notice how quickly Tristan’s mind moves on to the next investor.
When the quality of the questions drops, he knows, mid-pitch, that the
conversation is over—the rest is noise. Those half-hearted questions are like the
elevator music of the pitch process. It’s meant to pacify entrepreneurs. In fact, it
grates at them. It also wastes their time. Tristan will tell you he prefers a hard
“no” to a comforting “maybe.”

WALKER: ​Silicon Valley investors will tell you all the time, “We want to invest in
people who can execute with some semblance of pedigree, chasing a significant
whitespace and a big opportunity.” For us, it was like “Check, check, check,
check”—and we heard 99 percent no’s. How much is bullshit, right? And you’re
just trying to say something that I want to hear, as opposed to telling the truth.
And I wish that Silicon Valley would tell the truth a little bit more.

HOFFMAN:​​ Tristan raises a really interesting question here. How much of this
investor hemming and hawing is, well, bullshit? What’s really going through their
heads?

HOFFMAN:​​ As a partner at Greylock, I want to share what happens after an

entrepreneur leaves the room, and an investor is left to mull over a crazy idea. It
begins with the debrief of the investor’s partners.
 If I'm presenting an idea to my partners at Greylock, and they all go, “That's
great! We should do that.” I'm like, “Shit. Here's a bunch of hyper-smart people
and no one's saying, ‘Oh, watch out for this, or watch out for that.’” It’s too easy.
The idea is so obviously good, I can already hear the stampede of competitors
trampling over our hopeful little startup. On the other hand, you don’t want every
person in the room to say, “Reid, you're out of your fucking mind,” because then
you're wondering, “Hmmm, am I drinking the Kool-Aid in a very bad way?”

What you want is some people going, “You guys are out of your minds,” and
some people going, “I see it.” You want a polarized reaction.

So take my decision to invest in Airbnb as an example. David Sze told me during

the Airbnb debrief:

ROBOTIC VOICE: ​David Sze is a partner at Greylock Investment.

HOFFMAN: ​“Well, every venture capitalist has to have a deal that doesn't work
that they learn from. Airbnb can be yours.” And David Sze is a super smart VC;
he invested in LinkedIn. He invested in Facebook. He invested in Pandora. He
personally returned two-and-a-half billion dollars to Greylock’s funds. He’s as
smart as smart money gets—and believe me, I weigh his objections carefully. If
someone as smart as David disagrees with me, I worry.

But I also get excited—it’s an emotional roller coaster. And as this sort of
emotional turmoil plays out in the background discussion, it’s hard to give an
entrepreneur a hard “no.” The best ideas make you want to say “yes” and “no” in
the same breath.

FERRISS:​​ ​So you want to hear a “squirmy no.” The “squirmy no” refers to the kinds of
no’s that mean you’re potentially on to something. But let’s be honest: it’s never easy to
hear “no”. And sometimes it can be extremely excruciating, terrible. So Reid also asked
a few entrepreneurs to talk about how they deal with rejection, and how they learn from
rejection.

HOFFMAN:​​ So you have to gird yourself for a string of rejections. Some

entrepreneurs simply develop a thick skin. Others treat it like a normal part of
their workday. You know, wake up, brush your teeth, listen to people crush your
dreams. It’s a living.

But there’s another, more hopeful approach. Our producer, Dan Kedmey, talked
with a number of entrepreneurs who pitched seemingly laughable ideas in all
kinds of industries. Like Abby Falik, founder and CEO of Global Citizen Year. Her
not-for-profit sends students abroad for a year of international service between
 high school and college. Back in 2008, she was struggling to get funding, and
she turned to a leadership coach for advice. We asked her to share that advice.

ABBY FALIK:​​ The no’s are actually a gift.

HOFFMAN: ​You heard that right, a ​gift​. ​

FALIK: ​And he said between now and when we talk two weeks from now, I want
you to go out into the world and gather as many no’s as you possibly can. It is
your homework to be rejected over and over and over and over and come back
and report on it. And it ended up being the most important thing I could have ever
done, and the most important advice I could have been given at that point.

HOFFMAN: ​The most successful entrepreneurs listen closely to the no’s. They
mine their rejections for clues. Kathryn Minshew, the founder of The Muse, got
her share of rejections over the course of 148 no’s she shared at the top of this
episode. We asked her for the reasons that investors turned her down.

MINSHEW:​​ “It's a bit too early for us but keep in touch.” “Once you hit 100,000
monthly active users, give me a call.” “This is a fool's errand. It's expensive. It
doesn't scale.” “That's not very tech, that's not a scalable platform.” “Aren’t you
worried that you're going to lose all your users once they turn 30 and, you know,
have babies?” Or, “I get that women in New York and San Francisco love this
product, but I think you're going to really have a hard time finding women who
care about their careers once you go outside of the coasts.” And I just remember
looking at these people and thinking, “Do you know a lot of women?”

HOFFMAN:​​ Kathryn is right to ask this question. She knows more about women
than most investors, and she also knows more about her business.
Entrepreneurs have to learn how to hold on to what they know through the
arduous pitch process.

FERRIS: ​Commandment number two: hire like your life depends on it because it does.
Hiring the right people can make or break a company. And this is a theme that comes up
again and again with successful founders.

Airbnb’s Brian Chesky personally interviewed the company’s first 500 employees, for
instance. That was incredibly time-consuming, painstaking work, but Brian would not
have had it any other way. Patience, he says, in this particular case, pays dividends.

BRIAN CHESKY​​: And one of the most important decisions a startup can make is
who they hire. Because who they hire becomes them. And so we interviewed
people for core values. What this ended up, and that meant we spent like four or
 five months to hire our first engineer. Back then a lot of people thought we were
crazy because time is of the essence when you're a startup. You've said it's like
jumping off a cliff and assembling the airplane on the way down. Imagine jumping
off the cliff, trying to assemble the airplane on the way down, and someone's
there to help you with the airplane, and you spend five months debating whether
they'll fit the culture.

Meanwhile the ground is coming. That takes like real patience and some
courage. The reason we did that though was because we thought in the
high-class event we are successful: do I want to work with 100 more people like
this? Because if I hire someone, they are going to interview the new people. And
so we thought of hiring as this mechanism where, do I want to, if I could hire
anyone in the world, would I hire the person sitting across me, and do I want 10
or 100 more people like them?

FERRISS:​​ But if you launch a truly successful company, eventually, the hiring process
has to scale. Eric Schmidt had a lot to say about hiring quickly, but not hastily. It’s one
thing to do something quickly, quite another to do something in a rush. When he was
CEO of Google, the company quadrupled in size each year, while maintaining
super-high standards, which are famous even within Silicon Valley. He told Reid how he
did it:

ERIC SCHMIDT: ​So the company was getting very large, very quickly. And I had
suggested to Larry and Sergey that there was a problem with what I called “glue
people.” And glue people are very nice people who sit between functions, and
help either side, but don't themselves add a lot of value. And I thought, “These
are nice people, but we don't really need them. We can have these groups
talking directly.” And Larry looked at me and says, “We could solve this problem,
if you would just review all the hiring.” And I said, “Larry, we can't look at all the
hiring.” He said, “Sure we can.”

So the company, of course, invented a number of hiring algorithms, which are

used throughout the industry today. Many of them include pretty aggressive
hiring interviews from peers, asking people to do work, and so forth. Ultimately,
the judgment has a lot to do with whether the person is interesting or not. And so
we would, for example, take a position that we want to hire rocket scientists,
because rocket scientists are inherently interesting. And in sales, we love to hire
Olympians. Or Super Bowl winners, or football players—because the discipline
that they had in their lives as young people—men and women—to get to that
point indicated that an extra set of discipline.

HOFFMAN: ​I want to acknowledge that most companies don’t have the option of
hiring rocket scientists, Olympic athletes, and Super Bowl winners. But Eric does
 have more pragmatic advice for companies that can’t set the bar at Himalayan
heights.

SCHMIDT: ​So today I would suggest that—and this has since been confirmed by
many studies—that persistence is the single biggest predictor of future success.
And so we would look for persistence. And the second thing was curiosity. What
do you care about? The combination of persistence and curiosity is a very good
predictor of employee success in a knowledge economy.

FERRISS: ​So persistence plus curiosity is one formula for hiring success. Mark
Zuckerberg, the CEO of Facebook has another. Here’s what he told Reid:

MARK ZUCKERBERG:​​ So the single most important thing is to get the best
people you can around you. When I look at my friends who were running other
good companies, the single biggest difference that I see in whether the
companies end up becoming really great and reaching their potential, or just
pretty good, is whether they’re comfortable and really self-confident enough to
have people who are stronger than them around them. I've adopted this hiring
rule, which is that you should never hire someone to work for you, unless you
would work for them in an alternate universe.

Which doesn’t mean that you should give them your job, but just if the tables
were turned and you were looking for a job, would you be comfortable working for
this person? I basically think that if the answer to that is “no,” then you're doing
something expedient by hiring them, but you're not doing as well as you can on
that.

There are all these things that Sheryl, for example, is just much stronger than me
at, and that makes me better and makes Facebook better. And I am not afraid or
threatened by that—I value that. That's what makes Facebook good.

FERRIS: ​Of course, here Mark is talking about Sheryl Sandberg, COO of Facebook. And
she has her own take on this rule ...

SHERYL SANDBERG​​: The lesson everyone talks about, but I really mean, is
you really do want to hire people who are better than you are, and who are
different than you are. This is where we talk about diversity. I don't just mean
racial, national, age, gender. All of that diversity is super important. In addition to
that cognitive diversity, which you get from all those backgrounds, but also just
personality diversity.

If you are a white male who likes to code and sci-fi movies, you probably don’t
want your whole team to be that. I think about David Fischer. David Fischer and I
 have worked together at Treasury, at Google, and at Facebook. Personality types
were just very different. I'm much more up and down. I will get nervous
something's not moving fast enough. I will be exuberant, and I will be down. Not
David. David is absolutely calm. Over decades of working together, that balance
has really been important, because sometimes I’ll look at David and say, “This is
an emergency.” He'll say, “No it's not Sheryl, calm down.”

And sometimes I'll say, “David, you're not moving fast enough,” and he'll say,
“You're right.” I think Mark and I have that too. We are very different. We are
separated by—obviously gender, 15 years, he's my boss, he's 15 years younger.
Completely different personalities, completely different working styles—and I
think that served Facebook well.

FERRISS: ​Commandment number three: in order to scale, you have to do things that
don’t scale. And this commandment came from the very first episode of Masters of Scale
with Brian Chesky and that is what got me hooked on this podcast, because of how
actionable the specific examples were. And it might sound counterintuitive that you have
to do things that don’t scale in order to scale but it’s really important that you get your
hands dirty in the early days. And specifically handcraft the experience for your handful
of first few customers. And to use a term the cool kids like, to finesse all of the
touchpoints.

So every single separate interaction that your product or service has with your customer,
if you were to look at it as say a slideshow or separate chapters, how can you optimize
each of those? And to serve your customers one-by-one, you often take a concierge
approach, and again, that is to perfect your prototype. At which point, then you can pour
fuel on the fire to scale. But if you do it beforehand, you run into all sorts of problems.
So, don’t stop until you know exactly what your perspective customers want. That’s what
Airbnb CEO Brian Chesky did.

Brian took Reid back to his lean years, the early days when he went door-to-door,
meeting Airbnb hosts in person. This clip we’re going to hear starts with Brian recalling a
conversation he had in 2009 with Paul Graham, of Y Combinator fame, who gave him
some perplexing, it seemed at the time, advice….

CHESKY​​: And he asked us, “Where's your business?” And I go, “What do you
mean?” “Like where's your traction?” And I go “We don't have a lot of traction.”
He goes, “Well people must be using it.” I said, “There's a few people in New
York using it.” And he said something I'll never forget. He said, “So your users
are in New York and you're still in​ ​Mountain View.” I said, “Yeah.” And he said,
“What are you still doing here?” And I go, “What do you mean?” He said, “Go to
your users. Get to know them. Get your customers one by one.” And I said, “But
that won't scale. If we’re huge and we have millions of customers, we can't meet
every customer.” And he said, “That's exactly why you should do it now because
this is the only time you'll ever be small enough that you can meet all your
customers, get to know them, and make something directly for them.”

HOFFMAN​​: Brian and his co-founders followed his advice to the letter.

CHESKY​​: We literally commuted to New York from Mountain View. So, we would
be in Y Combinator for Tuesday night dinners and then Wednesday Joe and I
would go to New York. We literally would knock on the doors of all of our hosts.
We had their addresses and we say, “Knock, knock. Hello. Hey, this is Brian,
Joe, we're founders, and we just want to meet you.”

HOFFMAN​​: Now, it’s a little creepy to just knock on the door unannounced.

CHESKY​​: We needed an excuse to get into their home.

HOFFMAN​​: So, they come up with an offer that host’s couldn’t refuse.

CHESKY​​: We'd send a professional photographer to your home and photograph

your home. Of course, we didn't have any money and we couldn't employ
photographers. So, Joe and I, we'd show up at their door and they're like “Wow.
This company is pretty small.”

HOFFMAN​​: These home visits became Airbnb’s secret weapon. It’s how they
learned what people loved.

CHESKY​​: It's really hard to get even 10 people to love anything but it's not hard if
you spend a ton of time with them. If I want to make something amazing, I just
spend time with you. And I'm like, “Well what if I did this, what if I did this, what if I
did this?”

HOFFMAN​​: From those questions, a handcrafted experience is born.

CHESKY​​: We'd find out “Hey, I don't feel comfortable with the guest. I don't know
who they are.” “Well what if we had profiles?” “Great!” “Well what do you want in
your profile?” “Well I want a photo.” “Great. What else?” “I want to know where
they work, where they went to school.” “OK.” So you add that stuff. And then you
literally start designing touchpoint by touchpoint. The creation of the peer review
system, customer support, all these things came from us literally—we didn't just
meet our users, we ​lived​ with them. And I used to joke that when you bought an
iPhone Steve Jobs didn’t come sleep on your couch, but I did.

HOFFMAN​​: [laughs] Yes. Was there a particular experience that has really stuck
 in your mind?

CHESKY​​: I remember we met with a couple hosts. It's winter. It's snowing
outside and we're in snow boots. We walk up to the apartment and we went there
to photograph the home. And we're like, “I’ll upload your photos to the website.
Do you have any other feedback?” He comes back with a book, it’s a binder and
he's got dozens of pages of notes. He ends up creating a product roadmap for
us, we should have this, this, this, this and this, and we're like, “Oh my god this is
our roadmap because he's the customer.” I think that always stuck in our mind
as, the roadmap often exists in the minds of the users you’re designing things for.

FERRISS​​: ​As Airbnb grew, Brian never stopped handcrafting the user experience. At
one point, to envision what Airbnb could become, he and his team imagined what he
calls an "11-star check-in experience.” And this was something I highlighted for myself
as a thought exercise that I wanted to try with a number of companies I’m involved with
and a few projects I’m working on myself.

Now only part of what follows was heard on Masters of Scale. For this particular episode,
they gave me the complete, uncut version of Brian’s thought experiment. So, I hope you
enjoy.

CHESKY​​: If you want to build something that’s truly viral you have to create a
total mindfuck experience that you tell everyone about. We basically took one
part of our product and we extrapolated what would a five-star experience be.
Then we went crazy. So a one, two, or three-star experience​ ​is you get to your
Airbnb and no one's there. You knock on the door. They don't open. That's a one
star. Maybe it's a three star if they don't open, you have to wait 20 minutes. If
they never show up and you’re pissed and you need to get your money back,
that's a one-star experience. You’re never using us again.

So, a five-star experience is you knock on the door, they open the door, they let
you in. Great. That's not a big deal. You're not going tell every friend about it. You
might say, “I used Airbnb. It worked.” So, we thought, “What would a six-star
experience be?” A six-star experience: You knock on the door, the host opens.
“Hey, I'm Reid. Welcome to my house.” You’re the host in this case. You would
show them around. On the table would be a welcome gift. It would be a bottle of
wine, maybe some candy. You'd open the fridge. There's water. You go to the
bathroom, there’s toiletries. The whole thing is great. That's a six-star experience.
You'd say, “Wow I love this more than a hotel. I'm definitely going to use Airbnb
again. It worked. Better than I expected.”

What's a seven-star experience? You knock on the door. Reid Hoffman opens.
Get in. “Welcome. Here's my full kitchen. I know you like surfing. There's a
 surfboard waiting for you. I've booked lessons for you. It's going to be an
amazing experience. By the way here's my car. You can use my car. And I also
want to surprise you. There’s this best restaurant in the city of San Francisco. I
got you a table there.” And you're like, “Whoa. This is way beyond.”

So, what would an eight star start check in be. An eight-star check-in, I would
land at the airport. I would show up and there would be a limousine waiting for
me. The limousine would be like, know all my preferences. It would take me to
the house and it would be like a total surprise. So, what would a nine-star
check-in be? A nine-star check in, I would show up to the airport and there'd be a
parade in my honor. And I would probably have an elephant you know waiting for
me as the traditional Indian ceremony. I would ride on the elephant and there'd
be this parade taking me to the to the house.

So, what would a ten-star check in be? A ten star check in would be The Beatles
check in. In 1964. I'd get off the plane and there'd be 5,000 high school kids
cheering my name with cars welcoming me to the country. I'd get to the front yard
of your house and there'd be a press conference for me, and it would be just a
mindfuck experience. So, what would an 11-star experience be? I would show up
at the airport and you'd be there with Elon Musk and you're saying, “You're going
to space.”

The point of the process is that maybe 9, 10, 11 are not feasible. But if you go
through the crazy exercise of keep going, there’s some sweet spot between they
showed up and they opened the door and I went to space. That's the sweet spot.
You have to almost design the extreme to come backwards. Suddenly, doesn't
knowing my preferences and having a surfboard in the house seem not crazy
and reasonable? It's actually kind of crazy logistically, but this is the kind of stuff
that creates great experience.

FERRIS: ​Sam Altman, President of Y Combinator, considers this so-called 11-star

experience as a prerequisite to scale. Suppose you try to scale a sub-par experience —
the sort of product that gets only lukewarm approval from users or just polite indifference
– that four or five stars is a default? He offers a cautionary tale in this following clip.

SAM ALTMAN​​: The first thing you have to do is build a product that is so good,
people spontaneously want to use it and tell their friends about it. And if you can
do that you still have to blitz scale but it's the easy kind it's you have too much
demand. The hard kind of blitz scaling is where you try to start scaling up before
the product is really great. And then most of your effort in scaling is to generate
demand.

So I think the number one most important insight about how to blitz scale is that
 the good kind of blitz scaling is when you are not having to generate demand as
you go but that you first got the product right. And in many of these cases
— Stripe, Dropbox, Airbnb — they took a long time to get their product right but
they were obsessed with that. And then when they did all their effort is “Okay, we
have so much demand that without much more effort, we know this is going to
keep growing 20, 30 percent a month for years.” That’s a real problem. It’s a
high-class problem, but it’s still a real problem. How do we build that? So that is
the kind of scaling that works, and it has generated Facebook, Google I mean a
lot of it. It’s the same playbook. I think the kind of blitz scaling that we have seen
go badly is “We have a mediocre product. We have raised hundreds of millions of
dollars and our VC is beating down our throats to hire more salespeople to grow
faster.”

HOFFMAN​​: Any particular examples?

ALTMAN:​​ I don't want to name names. There’s so many to pick from. Thankfully
most them are not YC. One thing that is pretty good and again a few exceptions
to this, we try to beat that idea out of people at YC and thus most of the mistakes
in Silicon Valley of that sort in the last decade have not been ours.

FERRIS:​​ Commandment number four: raise more money than you think you need —
potentially a LOT more. Now, this is a somewhat controversial point and some venture
capitalists, VCs, argue the exact opposite, that you should try to be as lean as possible. I
think, in fact, the top performing venture capitalists, of which Reid would certainly be
one, even if they voice seemingly conflicting opinions, would agree that it’s largely a
matter of what you have done before you raise the money. Much to Sam Altman’s point,
which is a critical condition.

So for instance, when I’m personally getting involved in startups, and I have something
like 70 different startup investments since 2007 (if you want to see them, you can check
them out at angel.co/tim), you will notice that most of them are direct-to-consumer,
many, because that’s where I can affect the outcome to the greatest extent. And some of
the most successful to date have focused on product, exclusively, no marketing and PR
in very early days, and have shunned PR in fact and business development
opportunities and self-funded whenever possible to the point that they have a functional
prototype. Meaning that they have identified some type of product market fit, as it’s
called, and they have refined something that they feel that they can then pour gasoline
on. And that is certainly true, for instance, in the case of a number of companies like
Uber, just to take one.
When I was initially interacting with Garrett and Travis, both the co-founders, this was
before Uber was Uber. It had a different name, it was an LLC, so prior to raising money,
looking at prototypes, looking at the market research that they did, looking at how they
tested it, looking at how they interviewed potential users but especially potential drivers,
to really come up with a, let’s call it, a version zero, that got traction before they went out
and then looked for external validation and financing, meaning through venture
capitalists. And that I think is a common characteristic among all of my best investments,
at least the early stage investments.

So, back to the commandment. In this particular case: raise more money than you think
you need, potentially a lot more. So, you’ll notice Uber, at least in one case, raised initial
money after they had satisfied a lot of conditions and product refinement. And then after
they saw the opportunity to scale, raised more money than they thought they would
need.

And the logic for this, Reid would argue, is that entrepreneurs are always going to run
into a minefield of unexpected problems and expenses.​ H ​ e explains this particular point
with a story. One that involves Mariam Naficy, CEO of Minted and then the CEO of
EVE.com.

HOFFMAN: ​Silicon Valley is on fire, nothing bad could happen. My friend,

Mariam Naficy, is CEO of a startup called Eve. And she had to have the domain
name oEve.com. The only problem? She has to convince the owner to sell it to
her and was facing a negotiation that I do not envy.

YOUNG GIRL​​: Hello? Who is this?

MARIAM NAFICY​​: It is a five-year-old girl, Eve Rogers.

YOUNG GIRL​​:​ ​This is Eve.

NAFICY​​: ...who gets on the phone. And so, I think, "What on earth am I going to
say to this 5-year-old?" So, I said, "Hello.”

YOUNG GIRL​​: Hi.

NAFICY​​: “Could I buy your domain name?" And she was just saying to me,
"What? I don't really understand."

YOUNG GIRL​​: Um, what?

NAFICY: ​And I'm sure Eve's mom, on the other line, was laughing her head off. I
 mean, this is a great joke to play on this silly entrepreneur from California who's
calling. “I'm just going to watch her be tortured by my five-year-old for a while."

HOFFMAN​​: Mariam then turns this risky negotiation over to her lead investor, the
legendary start-up whisperer, Bill Gross.

NAFICY​​:​ ​So, he gets on the phone with her mom, and he negotiated the
purchase. And it was equity in the company, a board seat for her daughter—an
observer board seat—trips to Idealab to see Bill several times a year.

HOFFMAN​​: You had a five-year-old observer on your board? [Laughing]

NAFICY​​: Yes. She didn't actually show up for the board meetings, but she did
occasionally come by and visit. Disneyland, software, educational software—it
was a very large package that was negotiated.

HOFFMAN​​:​ ​If you were going to call your younger self, how would you have
handled this negotiation differently?

NAFICY​​:​ ​I would probably throw in the Disneyland almost immediately, because

now I know what a five-year-old girl wants. I have a daughter. And I would have
said, "How many times a year do you want to go to Disneyland?”

HOFFMAN​​: Once a year? Twice a year?

YOUNG GIRL​​: Maybe about 100 times a year.

NAFICY​​: Exactly.

HOFFMAN​​: [Amused] $50,000 plus Disneyland trips may seem like ​crazy
expenses. But in my experience? ​Every​ successful founder has a story like that.

Ferriss: ​Reid is totally right in this case and in many cases of course. You need enough
capital to cover unexpected expenses, as we’ve already covered, sure. But you also
need to be prepared for unexpected opportunities and you might need some type of
resources to exploit those.

We’ll fast forward here to Mariam’s new company, Minted, which she originally thought
would be an online stationery store with cards from brand-name companies. But she
also side experiment where unknown artists could submit designs to an online
competition. She told Reid what happened next:

NAFICY​​: I open the doors. There's not a sale for an entire month. Nobody wants
the branded stationery products that we'd spent most of our two-and-a-half
million launching—because again, being conservative, I'd said, "I know, I'll do an
Eve.com, I'll put all these brands online, sign them up exclusively.” We had
exclusive distribution rights. Nobody wanted to buy them at all.

Instead, the teeny-weeny assortment that I had sourced through this one
competition I had run, one transaction a week. Then the next week, there were
two. We had sourced 60 designs through our competition, and I'd saved a tiny bit
of money to build what I ​really​ wanted to build.

Out of the two-and-a-half million, I probably spent like $100,000 on what really
became Minted. It was like this little side thing, and there was a programmer up
in Oregon, and he and I were working at night on building the first competition.
And that is the only place where we saw any sales movement.

HOFFMAN​​: Mariam stumbled onto the power of crowdsourcing—the idea that

ordinary people, when they come together in large numbers, can do work once
reserved only for experts. Etsy is an example of this. Kickstarter as well. But at
this point, in 2008, it wasn’t understood very well. It was something Silicon Valley
was just getting its head around.

NAFICY​​: I realized that this crowdsourcing thing was way different, and I'd
uncovered something that was more of a massive social, cultural change going
on in the US—and maybe in the world—versus just some small-business idea.
Because what was happening, that I didn't realize, was that who's considered a
creative out there is actually changing a lot right now, due to technology and
exposure. And so, people are emerging as creatives who haven't gone to school.
They haven't gone to design school, they haven't gone to art school, and they're
massively disrupting art and design right now. And there is a true meritocracy
that you can actually build and unleash.

HOFFMAN​​: Here, Mariam runs into another reason you need to raise more
money than you think you need: unexpected opportunities. Mariam’s plan to start
a lifestyle business just didn’t pan out. She didn’t have enough funding to cover
her Plan B—or her “Plans B” as I like to say. Opportunities may arise later than
you hoped, and you want the capital to carry you in new directions. So, she
reluctantly pitched her idea and secured another round of funding. And if that
weren’t risky enough, she’s about to encounter one more familiar source of
uncertainty… a stock market crash.

NAFICY​​:​ ​And we raised our venture around two weeks before Lehman failed,
because this investor of mine had said to me, "I feel something really bad is
going to happen, you should go raise." So, we just went out in August—"Who's in
 town? Anybody? Is anyone in town in August?" So, we went and raised money,
and closed it literally right before Lehman [Brothers] failed.

HOFFMAN​​: Believe it or not, Mariam launched her wildly risky, experimental

business idea into the heart of the worst economic crisis since the Great
Depression: the collapse of the U.S. housing market in 2008. Suppose she had
waited until, say, September to raise that money. Lehman collapses, panic grips
investors and no one in their right mind gives cash to a bold little experiment in
crowdsourcing. Like that, Minted closes for business. Which is another reason
you should always take the money whenever and wherever you can get it. You
know never know when it will dry up.

FERRISS: ​Commandment number five: release your products early enough that they
can still embarrass you. Imperfect ​is​ perfect, in this case. ​The fifth commandment is
actually one of Reid’s more famous recommendations. He believes that if you’re not
embarrassed by your first product release, you’ve released too late.

And there are certain subtleties to this of course. And I should note that, this is just one
example of how Reid thinks of speed. And I’ve become fascinated by how he prioritizes
speed in all areas. And to that point, I would love to read something from a piece called
Ten Thousand Hours with Reid Hoffman, written by Ben Casnocha, you can find him as
casnocha.com.

And one of the core tenets, one of the lessons learned, is speed. And so the words that
are going to follow are Ben’s:

“​His first principle is speed. His most tweeted quote ever is, “If you aren’t embarrassed
by the first version of your product, you shipped too late.” His second most tweeted
quote ever is, “In founding a startup, you throw yourself off a cliff and build an airplane
on the way down.” Practically, he employs several decision-making hacks to prioritize
speed as a factor for which option is best—and to speed up the process of making the
decision itself. When faced with a set of options, he frequently will make a provisional
decision instinctually based on the current information. Then he will note what additional
information he would need to disprove his provisional decision and go get that. What
many do instead – at their own peril – is encounter a situation in which they have limited
information, punt on the decision until they gather more information, and endure an
information-gathering process that takes longer than expected. Meanwhile, the world
changes.​”

Just a quick note from me: this is very similar to how good military strategists think of
making decisions. Back to Ben:

“​If you move quickly, there’ll be mistakes borne of haste. If you’re a manager and care
seriously about speed, you’ll need to tell your people you’re willing to accept the
tradeoffs. Reid did this with me. We agreed I was going to make judgment calls on a
range of issues on his behalf without checking with him. He told me, [​FERRISS: ​This is
the part I highlighted for myself in Evernote.]

“In order to move fast, I expect you’ll make some foot faults. I’m okay with an error rate
of 10-20% — times when I would have made a different decision in a given situation – if
it means you can move fast.”

FERRISS: ​I’m going to reread that. And just for people who don’t know, foot faults, I had
to look it up, is an expression used in tennis, where if they serve and their foot goes over
a line, that’s a foot fault. That is an error. So again, here’s the quote from Reid to Ben,
who was his chief of staff, and handling a lot.

“In order to move fast, I expect you’ll make some foot faults. I’m okay with an error rate
of 10-20% — times when I would have made a different decision in a given situation – if
it means you can move fast.”
And then Ben closes with: “I felt empowered to make decisions with this ratio in
mind—and it was incredibly liberating.”

And here’s a condition that I want to emphasize that Ben also brings up, here we go:

“Big companies are different. Reid once reflected to me that the key for big companies
like LinkedIn is not to pursue strategies where being fastest is critical—big companies
that adopt strategies that depend on pure speed battles will always lose. Instead, they
need to devise strategies where their slowness can become a strength.”

Thank you, Ben. So back to Reid’s commandment, so to speak. Release your products
early enough that they might still embarrass you. ​This is the classic Silicon Valley
approach of pushing imperfect things out, testing them and improving them with user
feedback — iterate, iterate, iterate. We’ve all heard about this, instead of waiting until
you​ think​ you have something perfect.

Now, I should know. As someone who writes books, as someone who has podcasts, that
I don’t think this is always interpreted very well and people think it’s an excuse to put out
really haphazard products or services. And it works best for products and services that
can be iterated and pushed out to the initial recipients very easily, like certain types of
software or certain types of apps.

In the case of a book, you don’t have that option. You put out a book, unless it is a
Kindle version, and people are going to go back and reread what they already read,
you’re not able to say, immediately update the user experience for the first hundred
thousand people who buy your book. So you think about this, or at least I think about
this, slightly differently.

If you’re putting out a book chapter by chapter, on the other hand, perhaps, I would use
a slightly more fast and loose approach, which I certainly see implemented with dozens
of the startups that I work with like Shopify, whose offices I’m sitting in right now.

Alright, so, who is the person that epitomizes this? Mark Zuckerberg of Facebook is
probably the person who most embodies this commandment in many people’s minds
and Reid talked to him about it. Here’s some audio.

HOFFMAN​​: My friend Mark Zuckerberg is the perfect person to talk to about this.
He has no qualms about rushing out an imperfect product. In fact, his famous
mantra is “Move fast and break things”—and I’d argue that it’s the foundation of
Facebook’s success. If Mark cares about anything, it’s making sure his team
moves with the swiftness of a teen hacker, releasing products that are anything
but perfect, so their audience can improve them.

ZUCKERBERG:​​ I think the strategy of Facebook is to learn as quickly as

possible what our community wants us to do—and that requires a culture that
encourages people to try things and test things and fail.

HOFFMAN: ​But how did he get Facebook’s 17,000-plus employees to shed their
perfectionist streaks? You’re about to find out. We’ll start Mark’s story when he
was an undergraduate at Harvard. By this time, he was in the habit of slapping
together programs on the fly. He couldn’t help himself.

ZUCKERBERG:​​ I took this class, “Rome of Augustus.” And the final exam—they
were going to show some piece of art from the Augustan period in Rome, and
you had to write an essay on the historical significance. And I was actually coding
the first version of Facebook when I should have been studying for that, so a
couple of days before the exam, I was like, "Alright, I’m kind of screwed." This
isn't something like math, where you could just show up, and figure out how to do
the problem on the exam. You actually need to know the context of this, or else
you can't write these essays.

HOFFMAN:​​ Wait a second, rewind.

ZUCKERBERG:​​ This isn't something like math, where you could just show up,
and figure out how to do the problem on the exam.

HOFFMAN: ​Who does that? In any case, with the exam fast approaching, you
might expect Mark to cut back on the coding. Instead, he doubled down on it.
 ZUCKERBERG:​​ I built this service where basically anyone in the class could go
to it, and it showed you a random piece of art, and you could type in whatever
context you thought was important. And then after that, it would show you
everything that everyone else in the class had put in. So, it was a study tool, but it
kind of crowd-sourced exactly what people needed to know for each piece of art.
And the professor ended up telling me after that, that the grades on the final were
higher than they'd ever been before. And I ended up passing that class.

HOFFMAN​​: Imagine, for a moment, what would have happened if Mark was a
little less hacker and a little more perfectionist. What if he took his time to get the
“Random Piece of Art” program just-so? It might have looked nicer. It might have
had more features. But he would have missed the opportunity to put it in front of
his classmates when they needed it, and more importantly, would have missed
the learning about ​how​ they used it.

But many of us—and I’m guessing most of Mark’s Harvard classmates—have a

tough time rushing things out. High-achieving people have a tendency to be
perfectionists. And the same instincts that make us good students, can make us
lousy entrepreneurs.

FERRISS​​: ​So, you have to unlearn how to be a perfectionist. And you also have to
unlearn the habit of listening to everything your users tell you because that will drive you
crazy and destroy your business. Reid will also tell you: You have to be selective in the
user feedback ​that you take into account and incorporate.

HOFFMAN:​​ Success has a funny way of sneaking up on the best entrepreneurs.

They devote themselves to understanding and serving a teeny cohort of users.
They don’t always recognize that this intimate link is precisely what enables their
product to evolve for the mass market. That’s one reason I encourage
entrepreneurs to release a product earlier than they’d like. Release, observe,
react—over and over again.

It isn’t just about speed, and it certainly isn’t about sloppiness, but rather a
precise dance between Facebook’s tiny team and its growing user base. The
users normally take the lead—but not always. Sometimes Mark had to break the
choreography and give the users a twirl.

That’s because you have to discern what users actually want. And Mark received
an early education in the gap between what users say and what they
do—particularly as he expanded the social network to new campuses.

ZUCKERBERG: ​We'd seen this funny dynamic where—we talked about how we
started it at Harvard, and then we'd launch at Yale, and then all the people at
 Harvard would be like, "Oh, come on. Them?" And then it's at every step along
the way. You go from Yale, and you launch at Columbia, and the people at Yale
are like, "Aw really? Those guys?" We’re at Indiana University, and Indiana State
launches, and the people at Indiana University are like, "Come on." So, we were
used to this this dynamic of people assuming that a change is like, "Why are you
doing this?" but then coming around pretty quickly.

HOFFMAN: ​Notice the lesson Mark is learning here—he’s learning how to listen.
Each college said they didn’t want another college to join—and then, as each
new college joined, the network got stronger, and people liked it more. This is a
great example of how entrepreneurs need to both​ listen to what users say, and
selectively ignore them. People can’t always accurately predict their own tastes
or even their own interests.

For example, a baseline for Facebook is: other people are going to upload
pictures about you, other people are going to tag them, and when those other
people tag them, your friends are going to see them, possibly before you. Do you
want that product, yes or no? Most people, described that way, would say “I don’t
want that product! No, no, no! I don’t want that product.” And yet everyone’s
super happy with that product. People systemically are very poor at predicting
their own reactions to new things.

FERRIS​​: ​The core idea here is that you have to experiment if you’re going to effectively
innovate. And this gets harder and harder as you grow, of course. Mark shared some
details on exactly how Facebook succeeds on a massive scale, how do you innovate as
a larger company, and how do you change your mantra over time. Reid Explains:

HOFFMAN:​​ For Mark and his growing team at Facebook, the mantra of “move
fast and break things” served as a rallying cry, and the philosophy made a lot of
sense when they were a fledgling startup. But when you have thousands of
employees moving fast and breaking things, someone has to clean up their
messes. As Facebook grew, Mark became aware of a growing tension between
his hacker ethos—to move fast—and his responsibility as CEO to avoid breaking
things on such a massive scale. Thus, a new mantra was born: “Move fast…with
stable infrastructure.”

ZUCKERBERG:​​ Well, it’s less catchy.

HOFFMAN: ​But the best mantras do more than just sound good. They give you
the resolve to make tough decisions.

ZUCKERBERG:​​ So "move fast," I think, is interesting, because you actually have

to be willing to give something up to get it. And the question is, "What are you
willing to give up?" And early on, the trade was, "Move fast and break things."
The idea was, we will tolerate some amount of bugs and flaws in the service of
moving faster and learning what our community wants faster. But we got to a
point where it was taking us more time to go back and fix the bugs and issues
that we were creating than the speed that we were gaining by going faster.

So we're like, "OK, we need a new strategy to enable us to move fast." And what
we came up with was: we're going to do this by building the best infrastructure.
So an engineer who comes from any company is going to be able to ship their
product faster here—and test it better, and move faster, and all these things—at
Facebook, than anywhere else in the world. So that's what we mean by "Move
fast with stable infrastructure." But again, we don't get it for free—we invest a
huge amount in building infrastructure. So I think these values always come
down to, what are you willing to give up to get something? Because they're not
free—nothing is.

HOFFMAN: ​Mark concedes that “Move fast with stable infrastructure” is a clunky
mantra. It doesn’t have the snappy appeal of “Move fast and break things,” but it
adds guardrails to protect the company in its new phase. You can still release
something bold and half-baked. You can still break things. Just don’t break the
infrastructure. Because the infrastructure is too slow to repair, and if you break
the infrastructure, it will ultimately slow you down.

And with that new rule in mind, Mark laid the groundwork for mass
experimentation on Facebook. How does it work exactly? One thing you should
know about Facebook: it has many faces.

ZUCKERBERG: ​At any given point in time, there isn't just one version of
Facebook running, there are probably 10,000. Any engineer at the company can
basically decide that they want to test something. There are some rules on
sensitive things, but in general, an engineer can test something, and they can
launch a version of Facebook not to the whole community, but maybe to 10,000
people or 50,000 people—whatever is necessary to get a good test of an
experience. And then, they get a readout of how that affected all of the different
metrics and things that we care about. How were people connecting? How were
people sharing? Do people have more friends in this version? Of course,
business metrics, like how does this cost the efficiency of running the service,
how much revenue are we making?

It can even kick off qualitative studies and ask people how happy they are with
this version. And then at the end of that, the engineer can come to their manager,
and say, "Hey, here's what I built, these are the results. Do we want to explore
this further and do this?" And giving people the tools to be able to go get that
 data without having to argue whether their idea’s good through layers of
management before testing something, frees people up to move quicker. If the
thing doesn't work, then we add that to our documentation of all the lessons that
we've learned over time. If it does work, then we can incorporate those small
changes into the base of what Facebook is—that now everyone else who is
trying to build an improvement, that's the new baseline that they need to get
against.

FERRISS​​: ​But when is it ok to experiment? Is it always ok? Is it possible that the risk or
cost could be too high? Mark sets a pretty high bar for this.

ZUCKERBERG:​​ On a day-to-day basis, a lot of the decisions that I'm making are
like, "Ok, is this going to destroy the company?" Because if not, then let them test
it. If the cost of the test isn't going to be super high, then in general we're going to
learn a lot more by experimenting and by letting the teams go and explore the
things that they think are worth exploring than by having a heavy hand in that.

FERRIS: ​And Reid holds — more or less — to his theory that you should be
embarrassed by your first product release.

HOFFMAN: ​The word "embarrassment" plays a key role here. Over the years,
some people have interpreted my theory as permission to cut corners, act
recklessly, or proceed without a clear plan.

But notice: I said, “If you’re not ​embarrassed​ by your product.” I ​didn’​t say "If
you're not ​indicted​" or "If you're not ​deeply ashamed​ by your product." Indeed, if
you launched so fast that your product generates lawsuits, alienates users, or
burns through capital without any apparent gain, you did in fact launch too soon.

FERRISS: ​Commandment six: Decide. Decide. Decide. E​very founder has to learn how
to make decisions. It is often times better to make a wrong decision, usually correctable,
than no decision. And we actually alluded to this earlier with my story about Ben and
Reid. This is something Eric Schmidt, former CEO of Google, learned when he was
taking flying lessons:

ERIC SCHMIDT​​: In aviation, they teach you to make rapid decisions, and they,
over and over again: “Decide, decide, decide.” It's better to make a decision and
just accept the consequences. And that discipline helped me in the hard times
when I was at Novell in a real hardcore turnaround.

FERRISS: ​It’s also served him well in the free-wheeling, idea-generating climate he
cultivated at Google. In fact, he might argue it was the secret to their success and
continues to be the secret to their continued success: you must have disciplined decision
making in order to survive let alone thrive.

SCHMIDT​​: The most important thing to do is to have quick decisions—and you’ll

make some mistakes, but you need decision-making. We ultimately adopted a
model of a staff meeting on Monday, a business meeting on Wednesday, and a
product meeting on Friday, and this was organized so that people could travel in
the right ways. And the agenda was, everybody knew which meeting the
decisions were made at—and so as long as you could wait a week, you knew
you would get a hearing on your deal.

I cannot tell you how many people have told me that at Google, decisions are
made today quickly, in almost every case, even at our current scale. And that's a
legacy of that decision. Most large corporations have too many lawyers, too
many decision-makers, unclear owners, and things congeal—they occur very
slowly. But some of the greatest things happen very quickly. We made the
decision to purchase YouTube in about 10 days—incredibly historic
decision—because we were ready, people were focused, we had a board
meeting—we wanted to get it done.

HOFFMAN: ​We have a word for these kinds of evasive maneuvers here in
Silicon Valley. We call it an OODA loop. That’s a fighter pilot term. It stands for
observe, orient, decide, act. The fighter pilot who has the fastest OODA loop
wins. The other one dies. If you’ve ever watched the movie Top Gun, you’ll have
a basic understanding of how an OODA loop works.

Tom Cruise’s character, Maverick, has a few bad guys on his tail. In a split
second, he orients himself to the enemy’s formation. Then he decides to perform
a crazy aerial maneuver—he acts, and he confounds everyone. Score one for the
free world. Now I’m not suggesting that tech executives secretly want to blast
each other out of the sky. What they do want is to perform slightly crazy,
super-fast maneuvers, again and again.

You’ll often hear founders asking: What is the OODA loop of an organization or
an individual? Because speed matters in combat, and also in fast-moving
industries.
FERRISS:​​ Commandment number seven: be prepared to both make ​and​ break plans. In
a fast-growing organization, leaders have to be ready to pivot. Even though pivot is
sometimes used as a word that can be a cover up for anything. And I think it was Marc
Andreessen, in my podcast episode with him who said, “When I was getting started, we
didn’t have a fancy word for it, we just called it a fuck up.”

Nonetheless, you have new competitors, new threats, new opportunities on an ongoing
basis. So you have to be adaptable. Nearly everything can be subject to change, so that
much I think, we can agree on. Reid talks about this concept with Facebook’s Sheryl
Sandberg.

HOFFMAN:​​ The path to scale always, unfortunately, includes some broken

promises, as Sheryl would soon find out. Everything—from interviews to office
space—changes as you grow. And even a small take-back can matter to a team.

SANDBERG​​: I'll give you another silly example that I don't think is
silly—birthdays. We celebrated everyone's birthday that day. Then it became that
week. Eventually we had a huge sheet cake with quarterly birthdays. My team
was 4,000 when I left, and everyone's name is on it. Now it sounds like that
wouldn't matter, but it did—because if you started out and we celebrated
everyone's birthday, and we took that away, that was a problem. Now I'm not
saying, “Be mean and don't celebrate birthdays.” I'm saying, “Figure out what
your systems are going to look like later and do it now.”

FERRISS: ​Sandberg’s ability to recognize when a once-functional system has stopped

serving the team’s culture and productivity keeps Facebook on track. Founders have to
be able to cut their losses when programs or projects no longer make sense, and this
very frequently happens, and I think this is something the founder of Softbank might
have mentioned at one point, but that company’s systems and processes often need to
be replaced when companies triple in size or hit multiples of ten. So say, if you go from
three to nine to 27 then at a 100 people or a thousand people or so on, systems need to
be replaced or updated. And Zynga’s Founder Mark Pincus is excellent at stopping
things when they’re not working.

HOFFMAN: ​By the time Mark launched Zynga, he was acutely aware of the
dangers of stubbornly sticking to his ideas. He started to draw the distinction
between his usually-great instincts and his not-always-great ideas.

PINCUS: ​I'll try anything, and I'll kill anything, and I'll kill it quickly. And I'm not
going to let killing an idea kill a winning instinct. And so that was a really core
idea that I'm still thinking about and learning as an entrepreneur. And I can see it
playing out so often in people's companies.
 HOFFMAN: ​Mark separates specific ideas—which must be killed when they don’t
work—from underlying instincts. And this willingness to kill ideas is essential to
making innovation work.

FERRISS: ​So, you have to be willing to pivot, and you have to make firm decisions. But
there’s one more thing (there are many other things of course, but one in particular): you
have to keep your team together, through the twists and turns. Margaret Heffernan,
former CEO of 5 tech companies, shared a story with Reid about a company that got this
right.

MARGARET HEFFERNAN:​​ I think the most sensational example of this I’ve ever
come across—I’ve spent a lot of time hanging out with and writing about Ocean
Spray, the cranberry company. They’re one of the biggest cooperatives in the
United States, an extraordinary business.

At one point, Pepsi tried very hard to buy them. And of course, the company is
owned by the cranberry farmers. So this was a really passionate, passionate
debate, you could never have resolved it by who cared most, because everybody
cared totally. It ended up the vote was 49.9% in favor of selling, 50.1% in favor of
staying an independent cooperative.

What made the company what it is today, which is very successful, global,
multi-billion-dollar business, is that after the vote, everybody got behind it. There
was no question. That’s the vote. That’s the outcome. Now we all work together
to make it successful.

FERRISS: ​Commandment number eight: don’t tell your employees how to innovate. And
there are certainly people who would disagree with or have a different tack but what
does that mean? That means manage the chaos, which might seem to be a
contradiction. Many creative people find that leading an innovative company actually
means a lot less of producing your own great ideas, and a lot more of shepherding your
employees’ great ideas to fruition. And they often come from unexpected places. Eric
Schmidt thought a lot about this when he was the CEO of Google.

SCHMIDT​​: I think a fair statement is that the founders built the company in the
image of what they saw at Stanford graduate school. So the offices for example,
if you had them, would have four people in them—which is the number of
graduate students that are in an office. And of course, everyone's very crowded,
and it's very casual. And of course, there's free food, and everyone is sort of
hanging out all day. And that graduate student culture—that sense that
somehow, we're about to discover something new—permeated the decision
 making, so they were able to invent a new ideas. So the culture of food and
benefits and being quirky came from the founders trying to recreate that feeling.

HOFFMAN: ​Amid this creative ferment, his job was simple. He just had to give
employees a slight nudge to deliver on their promising ideas.

SCHMIDT​​: The first thing I did was I went to the staff meeting. And the staff
meetings were long, and they were like being in graduate school. “What do you
think of this? What do you think of that?” But a real lack of business procedures,
and that kind of thing, which were easily remedied.

HOFFMAN: ​When you’re surrounded by bright young minds, you don’t have to
push too hard for interesting ideas. They tend to tumble out of conversations or
shared challenges and take you in unpredictable directions. But not every
manager is comfortable with this type of chaos. It requires a particular kind of
leader who can embrace both ​humility​—the uncomfortable notion that you don’t
have all of the best ideas yourself—and ​uncertainty​—because you can’t always
schedule innovation on a predictable timeline.​ ​I’m going to come right out and
say it: if you’re a control freak, you’re going to have a hard time with this.

FERRISS: ​Google is certainly not the first organization to embrace contained chaos, if
we want to call it that, but they do lean into it in a way that’s rare, especially for big
companies and even within Silicon Valley.

HOFFMAN​​: Eric took some radical steps to keep ideas flowing in the
organization. This meant empowering engineers and keeping management in
check. For instance, product leaders can draw in as many engineers as they’d
like on any given project, so long as they can convince engineers to join their
team.

I've talked to other managers at Google who are frustrated with this because they
argue: “We agree that my project is strategic. Why don't you just assign some
engineers to me?” And the answer is “No, no you have to persuade the
engineers that your project’s a good one to work on. And then, by the way, you
can have all of the engineers that you can persuade to work on that project.” And
that's central to Google’s culture for making progress.

Eric took this idea one step further. He granted employees the freedom not only
to choose their projects, but openly defy their managers along the way. Google
famously instituted a rule that any employee could devote 20% of their work
week to any project they’d like.

Twenty percent time was in some ways a logical extension of Google’s graduate
 school culture. Managers, like research advisors, can set timetables and budgets
for experimentation. But the staff, like the “students,” pick the research agenda.

SCHMIDT​​: Many, many initiatives in the company have come out of 20 percent
time ideas. Much of the mapping work, many of the search ideas, many of the
advertising, many of now the AI work, have come from people working and
practicing in new areas.

HOFFMAN​​: As Eric says, many of the products people know best — Gmail,
Google Maps, Google News, AdSense — grew out of ideas generated by
employees, during this 20% time. But WHY exactly, does it work?

SCHMIDT​​: And while the rule says you can do anything you want to with your 20
percent time, these people are computer scientists and engineers, they’re not
going to veer too far away from their core business and that is the genius of 20
percent time.

HOFFMAN: ​The tendency of high-performing employees to use their 20% time

productively is the ​well-documented​ genius of the program. But there’s also a
hidden​ genius of 20 percent time. It allows reasonable employees to defy
unreasonable m ​ anagers. And this institutionalized defiance can help balance the
power and keep high-performing employees engaged during challenging times.

SCHMIDT​​: So the interesting thing about 20 percent time is although it's reported
as you get to spend one day doing whatever you want, what it really served was
a check and balance on the power of the engineering management over the
subject. So if an employee is under pressure, the manager says you've got to
work harder you've got to give me everything you have. That employee can
legitimately look that boss in the eye and say I'll give you 100 percent of my 80
percent time. And that simple principle, which never really happens in practice,
but it's understood, empowers the employee with both dignity but also some
choices.

FERRISS: ​Commandment number nine: to create a winning company culture, make

sure every employee owns it. This commandment is very often overlooked, especially at
the startup stage and I’ve been guilty of this, I know many people who have. Many
founders, especially inexperienced ones, downplay the role of culture in their success, or
simply don’t know where to start.

And many of the founders, co-founders that I’ve worked with are in the latter category.
They recognize how it can be important and a critical, cohesive factor but they don’t
know where to start.
Reed Hastings, the founder & CEO of Netflix has strong feelings about company culture.
His first startup, Pure Software, sold for $750 million, so it was successful from an
objective standpoint. But he shared with Reed Hoffman that it failed when it came to
company culture. And when he started Netflix he wanted to correct that mistake and we
get to some of the concrete corrections and where you can find a lot more about the
specifics of that but here first, how Reid would sum it up.

HOFFMAN: ​So Reed made a very typical mistake in his first company. He
thought he could solve his company’s problems just by working harder. But hard
work isn’t enough; and more work is never the real answer. To succeed as you
scale, you have to leverage every person in the organization. And to do that, you
have to be very intentional about how you craft the culture. This was exactly the
lesson Reed took from Pure Software. Their management decisions had created
a culture that rewarded the wrong behavior and retained the wrong employees.

REED HASTINGS:​​ Well the mistakes in Pure was that every time we had a
significant error, sales call didn't go well, a bug in the code, we tried to think
about in terms of what process could we put in place to ensure that this doesn't
happen again and thereby improving the company. And what we failed to
understand is by dummy proofing all the systems that we would have a system
where only dummies wanted to work there, which was exactly what happened.
And so the average intellectual level fell and then the market changed as it
inevitably does in that case it was C++ to Java but it could be anything. And we
were unable to adapt to it because we had a bunch of people who valued
following the process rather than the first principle thinking.

HOFFMAN: ​Notice Reed’s double insight here. Pure software couldn’t adapt
because they had the wrong employees. And they had the wrong employees
because of management decisions that explicitly selected for those employees. It
was an insight that catapulted him.

FERRISS: ​What Reed learned from his first company was that culture directly impacted
both who worked in a company, and how well they performed. At Netflix, he knew he’d
need people who could adapt with the times as technology changed, as it very often,
and I should say, always does, and they went from a company that mailed DVDs to a
company with streaming video and original content.

The whole story is definitely worth hearing in the entire unedited version that is found on
the Masters of Scale podcast, but here we’ll stay focused on how this realization affected
Netflix’s culture and hiring practices. When Reed thought about growing the Netflix team,
he already had a very clear idea of who he needed. Here’s Reid Hoffman to explain what
Reed Hastings did next:
 HOFFMAN: ​Reed’s knowledge of history, the changing nature of technology and
the historical moment he was in, led to the understanding that he would need
people to change with the times. People who can rip up a process and return to
the first principles of delivering entertainment by any means necessary, whether
it’s horseback, mail, fiber optic cable — or maybe in the future Elon Musk’s
neural lace. Regardless, you need people who can change the business model,
fast.

So how did Reed identify those candidates? It started with a now legendary
document at Netflix: a collection of more than 100 slides known as the “culture
deck.” These slides defined exactly what the Netflix culture stands for, and who
they’re trying to hire, and what they can expect.

HASTINGS: ​The culture deck started about 10 years ago. So first couple of
years we were just focused on survival and then we got public in 2002. Cash flow
positive and it was clear we were going to survive. So we then started really
thinking about the culture, what we wanted to be, how we wanted to operate. And
so over successive years I improved this deck which I would go through with new
employees. And sometimes those new employees would love it, sometimes they
were like oh my god why didn't you tell me this before I started. That doesn't
make sense to me. And so we realized we should give it to every candidate. And
so then about 2007, 2008 we did that by posting it on SlideShare but again it was
really just to be able to send a link to the candidates and then you know and it's
not very pretty, it's not very highly designed, doesn't look like it's an external
marketing piece but that authenticity really people liked in the outside world and
now it's you know over you know 10 million views on SlideShare and continues to
be studied around the world.

HOFFMAN:​​ And what were the unexpected benefits of having published it?

HASTINGS:​​ Well let's see the core benefit which we did expect was that
candidates were very aware of the culture. The unexpected benefit was many
people became candidates for us because they loved that what we described in
terms of freedom and responsibility that might not have otherwise thought about
us.

FERRISS: ​Now when you read Netflix culture deck, which many people have, you’ll see
they have a very specific way of describing themselves — as a “sports team”, not a
“family”, which I love. They use internal collaboration to drive external competitiveness.

HASTINGS: ​In team sports that really succeed there often is a lot of warmth
between the players. And so it's emphasizing those aspects and demonstrating
 that when people come in everyone tries to help them but ultimately it is about
performance. Unlike a family which is really about unconditional love you know
even if your brother you know does something awful and goes to jail your love
doesn't stop ok and that's it just a different and important part of society. But
that's not what we're about. What we're about is collectively changing the world in
the areas of Internet television and that takes incredible performance at every
level. We're also about really honest feedback all the time. So you can learn and
be the best that you can be.

FERRISS: ​Most CEOs would agree that a successful company culture is one that that
lets team members be the best that they can be. And as you consider the best way to do
that for your company and your team, you’ll want to pay particular attention to how
people compete. This is where a lot of company cultures go​ ​sideways. Margaret
Heffernan,​ ​former CEO of five tech companies, says this:

HEFFERNAN: ​There is often a belief among very successful, very competitive,

people that the thing you want to do in a company is get everybody to compete
with each other, that if it's everybody is racing against everybody you'll have this
kind of a white heat of brilliance and creativity. And I think pretty much everything
about that's wrong. And that's not to say that I'm not competitive, I'm deeply
competitive with myself in the sense that I really want to do a better job today
than I did yesterday. But I don't want you to fail.

And I have seen more companies and organizations go wrong. Because of what I
think of as negative competitiveness. I do want you to fail or I want your
department to fail or I want your product to fail because that will make me shine.
I've seen more damage and destruction and waste from that mentality than
probably from any other misunderstanding.

We all grow up in education systems that are very individualistic: my grades, my

college place, so there’s always a tendency to think, “I have to get ahead.” But
actually, what makes people successful is each other. It’s you coming to me with
an idea and my thinking, “that’s interesting” or “what about this” or “I know
somebody you should talk to” or “Oh, go and look at this product, that might give
you some ideas”.

If you can build an environment in which people really want to help each other,
full of people who are generous you will do infinitely better than creating
something kind of Olympic sport within the company. And quite where this idea
that if we all competed against each other we’d all do better came from, I don’t
know. It’s definitely not Darwin.

But I see it especially I have to say among young men and this belief that at one
 level you know if everybody's is competing everybody will get faster. I think it's a
catastrophe. And I see it bring down really tremendous companies that get so
lost in the fight they forgot why they were there in the first place.

HOFFMAN​​: I totally agree and I actually think one of the key things that
companies do at scale in order to try to set against this because there's always
that kind of the “how do I win” this kind of a culture is to say that part of the
dialogue in performance reviews and culture and compensation is: how did you
help other people and in particular how did you help other people outside of the
specific team you're in. And I think that's actually I'm really glad to I asked you
that question because I think that what you just said is super critical.

HEFFERNAN​​: Well it's really interesting. I remember speaking at a conference

and on this subject in the Q&A someone said well you know how would you find
people like that when you're interviewing them for jobs. And I said, well I'd ask
them who helped them in their career because you know if they can't remember
anybody. That's a pretty bad sign you know. Anyway, the next person speaking
at this conference was the chief technology officer from somewhere. And in his
Q&A somebody asked him who helped you in the course of your career. And he
couldn't think of anybody. And there was this sort of stunned, horrified silence.
You know, and the truth is that all of us I'm sure this is true of you too, all of us
got help from so many people. And you can’t remember one of them? And of
course, actually, singing the praises of people who've helped you is absolutely
joyous task.

FERRISS: ​Commandment number 10: have grit and stick with your hero’s journey. So
the other commandments from Masters of Scale cover just about everything in first
principles, basic concepts, that you need to succeed as a startup founder: hiring and
funding, managing and innovating, making decisions fast and testing products early.
This tenth commandment makes all the rest possible. To succeed, entrepreneurs need a
good idea, sufficient resources, good timing, tough to always make that one work or
guess it, and of course that means, a certain amount of luck. But they also need to follow
this commandment: have grit and stay on your hero’s journey.

REID:​​ Some people mistake grit for sheer persistence. Charging up the same
hill, again and again. But that’s not quite what I mean by the word “grit.” The sort
of grit you need to scale a business is less reliant on brute force. It’s actually one
part determination, one part ingenuity, and one part laziness. Yes, laziness.

You want to conserve your energy. You want to minimize friction and find the
most effective, most efficient way forward. You might actually have more grit if
you treat your energy as a precious commodity. So forget the tired cliché of
running a marathon. You want to be more like Indiana Jones, somersaulting
 under blades, racing a few steps ahead of a rolling boulder and swinging your
whip until you reach your holy grail.

FERRISS:​​ Of course, the hardest time to show grit is when you need it the most. When
the situation seems dire, when the odds are against you. Reid sees these life-and-death
moments a lot in the companies he’s built and advised. Here’s what he thinks you should
do when you find yourself in such a position:

HOFFMAN:​​ ​These are the critical junctures that determine whether you fold or
scale your business. You might win big, and you might lose big. And grit is the
stick-to-it-ness that kicks in when you actually understand the risks — and know
you might die — but move ahead anyway. In fact, I have a prepared speech for
these pivotal moments.

I have a given a version of this speech at some point on every single board that
I've been on, which is the heroic possibility. That the road in front of you is super
fucking hard, that is not a given that you're going to win it. But if you win it you're
going to be a hero. And so, the question for you is: Are you a hero? And most
people then they kind of hear that speech they go, “Yeah,” because that's what
they want to be. That's why they're doing this. They want to be a hero. So you're
giving them a frame to do it. And you might lose, right? You might be dead on the
battlefield. This is why it's a hero's journey. This is why you will be heroes if you
do this. And by the way the people who don't resonate with that? You want them
off the boat.

FERRISS: ​Bonus commandment number 11: pay it forward. What does that mean?
Well, the other commandments from Masters of Scale covered just about everything you
need to succeed as a startup founder. The final commandment kicks in after you
succeed or reach some type of certainty that you’ll survive or just have a little bit of extra
cash on hand in some cases.

Because Reid will tell you, the long-term success of any company, anywhere in the world
— depends on the ecosystem around it. To create an ecosystem like Silicon Valley, and
many places have tried, where startups thrive, and scale-ups are possible — successful
entrepreneurs have to follow this commandment and pay it forward. That means they
invest in the other companies around them, the little guys.

In this next clip, Linda Rottenberg explains how she sees this. She’s the CEO of
Endeavor and her passion is in supporting entrepreneurs around the world. And Linda is
awesome, I haven’t seen her in years. Hi Linda! She says the willingness of successful
entrepreneurs to pay it forward is THE determining factor in whether a startup scene,
ecosystem, or city, thrives or not.
 LINDA ROTTENBERG​​: Many cultures have one or two or three successful
business people that create companies. But if they don't pay it forward and if they
don't reinvest in the ecosystem becoming mentors becoming angel investors
inspiring their employees to start companies then it stops. Right. And so what
Endeavor tries to do is create that that ecosystem foundation where the
successful entrepreneurs go on and pay it forward. And then that's when you see
a multiplier effect.

FERRISS: ​Linda has a great story about this...

ROTTENBERG:​​ It was really in 2000 when I got called into a room by Pedro
Aspe, the former finance minister of Mexico who was then leading the largest
private equity firm. And he had gathered a group of about 12 individuals. And
before I walked in the room someone said to me Linda, do you know what
percentage of Mexico's GDP is in this room? And I said no, and I don't think I
want to. So I was asked by it was Lorenzo Zambrano of Cemex, Carlos Slim of
you know all the telecom, Emilio Azcarraga of the media, etc.

And one of the people in the room said well why are all these entrepreneurs
coming out of Chile and Argentina and Brazil even Uruguay, like what's wrong
with Mexico. So, in my oh politically astute way, chica loca says to this group of
men, “well here in Mexico, you're the big fish. And think of entrepreneurs as the
little fish. And here the big fish tend to eat the little fish. So, if you want something
like Endeavor. Think of us like an aquarium where you learn to feed the little fish.”

And the fact that they actually didn't throw me out of the room, my life is about
not being thrown out of rooms I guess, and they all signed up. And in fact, a
decade later Emilio Azcarraga, one of his magazines had a study on, survey on
entrepreneurship in the country and the headline was big fish feeding the little
fish.

FERRISS: ​If you follow these 10 commandments you’ll be on your way to startup
success, life success, as well as your own hero’s journey. And this episode isn’t quite
over though, because I promised I would have some new questions that were burning in
my head for Reid that I wanted to get to him. And so let us jump right into that.

If you could have one gigantic billboard anywhere with anything on it, so metaphorically
speaking, getting a message to millions or billions of people, what would it say? It could
be a few words or a paragraph.

HOFFMAN: ​One of the​ ​quotes that I most love is this simple almost-haiku: If I am
only for myself, what am I? If I am not for myself, who will be for me? If not now,
 then when?

FERRISS: ​What is the book or books that you have given most as a gift?

HOFFMAN: ​Obviously, I give out my own books, fairly often: The Start-Up of
You, The Alliance. Recently, I’ve been giving out another book by a friend of
mine, Joshua Cooper Ramo, The Seventh Sense.

FERRIS: ​What fiction books have you reread or recommended the most?

HOFFMAN: ​Obviously, this is one of the places where my inner nerd, my geek
shows. The books I’ve most often read are Tolkien’s The Lord of the Rings,
because it’s so important to show this journey, these hobbits, these little people
in a hero’s journey about how you can change the world within a context where
Tolkien is fairly sophisticated around the questions of the corruption of power, the
intersection of races, and the needs for us to all to work together.

FERRIS: ​Is there a book that has most impacted your life?

HOFFMAN:​​ Well, I’m enough of a reader that many books have impacted my life.
I would say most recently, Sapiens has had me thinking a lot about what the
evolution of humanity and what our future looks like.

FERRIS: ​What have you changed your mind about in the last few years and why?

HOFFMAN: ​I’d give two answers here. The first is a personal one: which is
previously, I’d always avoided politics because it seemed like a zero-sum game
and I care about building things, I care about these Archimedean levers by which
you move the world. And yet I realized, that if I don’t myself engage in politics
and take a more active responsibility then I’m shirking my duties as a citizen. So
that’s a personal change.

Scientifically, I’ve actually come around to the view that artificial intelligence is
going to have a huge impact on our lives. I was an artificial intelligence
undergraduate and major and more or less thought, there were going to be some
interesting toys and not going to create something massive. And yet, as the five
years goes by, as 10 years goes by, as 20 years go by, I think we’re going to see
massive transformation in many industries, in many parts of life, that come from
it. I’m not yet at a view that we’re on a short path to artificial general intelligence
machines but the impact that the old techniques now applied is going to have on
our lives is going to be ferocious. And that’s something that I rediscovered in the
last few years.
FERRISS: ​What purchase of one hundred dollars or less has most positively impacted
your life in say the last six months or from recent memory?

HOFFMAN: ​This is going to sound a little strange, but my trainer started

recommending that I add moringa leaf powder to my tea. And that’s actually
added a rich antioxidant, anti-inflammatory, and a little bit more substance such
that drinking tea now feels a little bit like a snack and is super healthy.

FERRIS: ​What advice would you give to a college senior about to enter the so-called
“real world”?

HOFFMAN: ​Well, for the college senior, this is one the key audiences to which I
wrote my book, The Start-Up of You, and the answer is to think about yourself as
an entrepreneur, not necessarily starting a business but beginning a path that
isn’t a career path but actually in fact, a set of entrepreneurial experiences by
which you’re strategically defining your forward life. That means, looking for
opportunities that change your trajectory along the variables that matter to you.
Whether they’re economic, or mission, or people you’re working with.

FERRISS: ​What advice would you give to a smart, aggressive 30-year-old, assuming
that in both cases, they’re similar to how you were at that age?

HOFFMAN: ​For the 30-year-old, you know, it’s again much like The Start-Up of
You. But I think it begins to say, ok, here are the assets that I have, how do I
really leverage them, how do I amplify them? As opposed to those first steps in
the journey, thinking about, “ok, I’ve done this. What are the things that lead me
from here?”

Now, not surprisingly, in both answers, because I approach my life in a very

strategic way, these are ways that I was behaving both as a college senior and
as a 30-year-old.

FERRISS: ​How has a failure or apparent failure set you up for later success? Do you
have a favorite failure of yours?

HOFFMAN: ​Well one of the things that I like about the entrepreneurial life is that
we fail all the time. Like literally, I’ve got just like dozens of failures and failing fast
in order to try to succeed. And perhaps in this context, the best one is my very
first startup, SocialNet. I literally made most of the classic mistakes in the first
year. And all of the advice I give entrepreneurs, for example, if you’re not
embarrassed by your first product release, you’ve released too late, all of that
comes from lessons that I have personally learned. And so that that favorite
failure, my first company, SocialNet, was literally one of those experiences where
 when you say “oh, it’s a learning experience”, it really does mean lots of scars
and lots of blood on the floor.

FERRISS: ​What is the worst advice you hear commonly dispensed and repeated in your
field? That could be startups, VC, investing of other types, or whatever you choose.

HOFFMAN: ​So, the classic mistake that people say and entrepreneurs do is they
believe that what is valuable about what they’re doing is they have a unique,
secret idea. And that they should hold their idea close to their chest and not talk
to anyone about it because that’s the precious gem that they have.

And actually, the truth is your asset is that you are in motion on this idea and you
should talk to everyone smart who can give you feedback to try to refine the idea,
to try to build it. Because your unique asset is that you’re in motion on it and
you’re acting on it and you’re making something happen now. And you know, it
doesn’t mean you publish your idea to the world. But it does mean that every
time you can get good feedback that would help recruit people, help you refine
the idea, help you advance the idea, you take it.

FERRISS: ​What is an unusual habit or an absurd thing that you love? For instance,
Cheryl Strayed needs to perfectly layer each sandwich so that every bite includes every
ingredient.

HOFFMAN: ​You’d think, I’m a software guy, I’m a digital guy, that everything is
digital recording. Well I found this little shop in New York, online, called the
Unemployed Philosophers' Guild. And they sell these little notebooks, you know
like, Plato’s Republic and Alice in Wonderland and Pangea Passport and actually
having these little highly designed notebooks that kind of have these literary
references that are the things that I write notes on, that’s an absurd thing that I
actually love.

FERRISS: ​What rules or criteria do you use to determine what to say yes to?

HOFFMAN: ​Obviously, you get totally overloaded by saying yes and I frequently,
sadly, refer to myself, as a kid in a candy store, and I end up saying yes to too
many things and that creates a challenge. It’s kind of like “oh I’ll have that one
too” and “yes, that too!” And that’s challenging. So when trying to apply
intelligence and discipline to it, I look at a couple of different things.

So first, is it something that is big and important in the world, something I am

uniquely well-suited for? Second is, is it referred to me by someone I deeply
trust? Someone who knows me, knows the problem, or knows the opportunity
and thinks it should happen? And the third is, some room for serendipity. Some
 room for trying something new and different in a way that would stimulate me to
think or to learn or to essentially have a new epiphany or a new vista open for
you. And so always leaving room for some serendipity. Of course, between all of
that, the usual thing is that in every particular hour slot in my calendar, there are
usually 10 things that are competing for it.

FERRISS: ​Alright folks, that’s it. Thank you again, Reid. It’s always wonderful speaking
with you, learning from you, and congratulations on the new podcast among many, many
other things.

HOFFMAN: ​Thanks again to Tim for this fun podcast mashup. And his podcast is
The Tim Ferriss Show and you can read more of Tim’s blog at tim.blog.
Masters of Scale Episode Transcript: Brian Chesky

BRIAN CHESKY​: Joe and I are broke. We're losing weight and I didn't have a lot of
weight to lose. You know those binders that you put baseball cards in? We put credit
cards in them. At this point I am $25,000 in credit card debt. Joe is tens of thousands of
dollars in credit card debt. So this is make or break. We need a lifeline.

REID HOFFMAN​: That entrepreneur in need of a lifeline? That’s Brian Chesky. Co-Founder and
CEO of Airbnb, a service that lets you rent a couch for the night. Or a cabin. Or a castle. Today,
Airbnb is valued at $30 billion. Eight years ago? A very different picture.

CHESKY​: We have this website and maybe 50 people a day are visiting it and we're
probably getting like 10 to 20 bookings a day. By the way, we've been working for a year
and a half. So for anyone who's worried their company doesn’t have enough traction,
that was our traction.

HOFFMAN​: It was 2008. An election year in the United States. Barack Obama was running
against John McCain. Brian was at the Democratic National Convention, hatching a PR
campaign for Airbnb—one that could rescue the company and their credit card bills.

CHESKY​: Joe and I look at each other and we said “We're Air Bed and Breakfast. The
air beds aren't going so well. Maybe breakfast will.” So we thought, what if we could sell
breakfast? Maybe we can make some money. What's a non-perishable breakfast?
Cereal. So we thought the presidential campaign is coming up.

We just launched at the DNC. What if we created a Barack Obama themed breakfast
cereal? And we thought, what would a Barack Obama themed breakfast cereal be
called? Obama O’s like Cheerios, “The breakfast of change.” We thought, “Well, we want
to be a nonpartisan website so we'd also need a John McCain themed cereal.” John
McCain was a captain in the Navy and so we came up with Cap’n McCain's, like Cap’n
Crunch: “A maverick in every bite.” We ended up making a thousand boxes of collectible
breakfast cereal. We sold them for $40 a box.

HOFFMAN​: That’s $40,000. Not bad for pocket change. And it got them through a cash crunch.
But it came at a cost.

CHESKY​: We had to physically make the breakfast cereal ourselves, meaning we get a
printed poster board and we had to fold it and hot glue it. No one told me I had to hot
glue breakfast cereal and they should call it burn glue because every time you get it on
you, you burn you. I had a perfect one to one ratio of burn to box. I literally had to hot
glue a 1,000 boxes of cereal. At one point in the middle of the night I remember reading,
I wonder if when Mark Zuckerberg started Facebook he had to hot glue breakfast cereal.
The answer was no and this was not a good sign.
HOFFMAN​: But what ​was​ a good sign was Brian’s willingness to work with his hands—burns
and all. I’d argue that painstaking, handcrafted labor is actually the foundation of his success. In
order to scale, you have to do things that don’t scale.

[THEME MUSIC]

HOFFMAN​: I’m Reid Hoffman, co-founder of LinkedIn, partner at Greylock, and your host. On
this episode, I’ll make the case that the only way an organization can truly scale, is to first do
things that don’t scale at all. I’ll try to prove that theory through stories from some of the
smartest entrepreneurs I know.

Over the last 20 years, I’ve worked on or invested in many companies that scaled to 100 million
users or more. But here’s the thing: You don’t start with 100 million users. You start with a few.
So stop thinking big, and start thinking small. Hand serve your customers. Win them over, one
by one.

Now this may sound like odd advice if you’re an entrepreneur with global ambitions. Mark
Zuckerberg didn’t personally invite 1.8 billion people to Facebook. He built a great product, and
the users just poured in. Right? Not exactly.

On this show, I’ll dispel that myth by talking to founders who ​fought​ to win their users. I’m
starting with Brian Chesky, CEO of Airbnb because he epitomizes the idea of handcrafting the
user experience, before you start to scale. It’s a principle he first absorbed in design school.

CHESKY​: I was doing medical design once. I had to design a children's ventilator. I had
to sit in the shoes of the child. I had to imagine being a child, get in the operating table
and you had to put yourself in the shoes of the patient, or the person using your product.
If you're only doing A/B tests you're never designing with empathy.

HOFFMAN​: But a funny thing happened to Brian when he moved to Silicon Valley. He sort of
forgot about designing with empathy for a single user. It’s a common mistake among
entrepreneurs with global ambitions. They have to promise investors the world. Tens of millions
of customers. Billions in revenue. It’s intoxicating. Just listen to Brian go.

CHESKY​: This is a travel industry that is something like seven percent of global GDP,
somewhere between five and seven trillion dollars, ten times the market size of Google's
market size.

HOFFMAN​: And Brian might have stayed in the stratosphere, if not for a fateful meeting with
Paul Graham, Co-founder of Y Combinator.
 VOICE​: Y Combinator is a start-up incubator, which cultivates and invests in early-stage
companies.

HOFFMAN​: Brian was admitted into Y Combinator in 2009, and his first meeting with Paul was
confounding. Paul tends to stump people with deceptively simple questions.

CHESKY​: And he asked us, “Where's your business?”

And I go, “What do you mean?”

“Where's your traction?”

And I go “We don't have a lot of traction.”

He goes, “People must be using it.”

I said, “There's a few people in New York using it.”

And he said something I'll never forget. He said, “So your users are in New York and
you're still in​ ​Mountain View.”

I said, “Yeah.” And he said,​ ​“What are you still doing here?”

And I go, “What do you mean?”

He said, “Go to your users. Get to know them. Get your customers one by one.”

And I said, “But that won't scale. If we’re huge and we have millions of customers we
can't meet every customer.”

And he said, “That's exactly why you should do it now because this is the only time you'll
ever be small enough that you can meet all your customers, get to know them, and make
something directly for them.”

HOFFMAN​: Brian and his co-founders followed his advice to the letter.

CHESKY​: We literally commuted to New York from Mountain View. So we would be in Y

Combinator for Tuesday night dinners and then Wednesday Joe and I would go to New
York. We literally would knock on the doors of all of our hosts. We had their addresses
and we say, “Knock knock. Hello. Hey, this is Brian, Joe, we're founders and we just
want to meet you.”

HOFFMAN​: Now, it’s a little creepy to just knock on the door unannounced.
 CHESKY​: We needed an excuse to get into their home.

HOFFMAN​: So they come up with an offer that host’s couldn’t refuse.

CHESKY​: We'd send a professional photographer to your home and photograph your
home. Of course, we didn't have any money and we couldn't employ photographers. So
Joe and I, we'd show up at their door and they're like “Wow. This company is pretty
small.”

HOFFMAN​: These home visits became Airbnb’s secret weapon. It’s how they learned what
people loved.

CHESKY​: It's really hard to get even 10 people to love anything but it's not hard if you
spend a ton of time with them. If I want to make something amazing, I just spend time
with you. And I'm like, “Well what if I did this, what if I did this, what if I did this?”

HOFFMAN​: From those questions, a handcrafted experience is born.

CHESKY​: We'd find out “Hey, I don't feel comfortable with the guest. I don't know who
they are.” “Well what if we had profiles?” “Great!” “Well what do you want in your
profile?” “Well I want a photo.” “Great. What else?” “I want to know where they work,
where they went to school.” “OK.” So you add that stuff. And then you literally start
designing touchpoint by touchpoint. The creation of the peer review system, customer
support, all these things came from us literally—we didn't just meet our users, we ​lived
with them. And I used to joke that when you bought an iPhone Steve Jobs didn’t come
sleep on your couch, but I did.

HOFFMAN​: [laughs] Yes. Was there a particular experience that really stuck in your
mind?

CHESKY​: I remember we met with a couple hosts.​ ​It's winter. It's snowing outside and
we're in snow boots. We walk up to the apartment and we went there to photograph the
home. And we're like, “I’ll upload your photos to the website. Do you have any other
feedback?” He comes back with a book, it’s a binder and he's got dozens of pages of
notes. He ends up creating a product roadmap for us, we should have this, this, this, this
and this, and we're like, “Oh my god this is our roadmap because he's the customer.” I
think that always stuck in our mind as, the roadmap often exists in the minds of the users
you’re designing things for.

HOFFMAN​: It is typical to get very detailed feedback from some of your early users. And if
you're ​not​ getting some people who say “This is super important to me. I love this. I really need
this to work well,” it usually means you're off track. Passionate feedback is a clue that your
product ​really​ matters to someone. And one passionate user can turn into many, if you listen to
them carefully. It’s essential to get this kind of feedback ​early,​ while you’re still defining the
product. It’s like setting a foundation as an architect. You wouldn’t build a skyscraper before
you’ve build a solid foundation. User feedback ensures you won’t build a dozen floors on an
unstable swamp. Brian has a simple method for extracting detailed feedback from users. He
doesn’t ask about the product he already built. He asks about the product of their dreams.

CHESKY: ​We'd ask these questions like, “What can we do to surprise you?​ ​What can
we do, not to make this better, but to make you tell everyone about it?” And that answer
is different. If I say, “What can I do to make this better?” They'll say something small. If I
were to say, “Reid, what would it take for me to design something that you would literally
tell every single person you've ever encountered?” You start to ask these questions and
it really helps you think through this problem.

HOFFMAN​: It’s essential to seek out and listen to user feedback. But the caveat is: You have to
figure out which users to listen to. You're going to have different kinds of users giving you
feedback—and some of it will take you in the wrong direction. So you need to exercise judgment
in discerning: Will this particular user and particular feedback lead me to the mass market? Or is
it an edge case?

For example, at LinkedIn, we had one group of users who invented a name for themselves.
They called themselves LIONs—which is LinkedIn Open Networkers—because their theory of
the world was that everyone wants to directly connect to everyone else in the world—because
that's the way they wanted it. But they're actually not the majority case. A lot of people who are
very busy, who have access to resources, who have some celebrity status—​do not want that.
And if we followed their feedback, LinkedIn would not be where it is today. We had to steer
away from a bunch of passionate users who told us ​very​ ​explicitly​ that we were fools for not
following their advice.

CHESKY​: If you want to build something that’s truly viral you have to create a total
mindfuck experience that you tell everyone about. We basically took one part of our
product and we extrapolated what would a five star experience be. Then we went crazy.
So a one, two, or three star experience is you get to your Airbnb and no one's there. You
knock on the door. They don't open. That's a one star. Maybe it's a three star if they
don't open, you have to wait 20 minutes. If they never show up and you’re pissed and
you need to get your money back, that's a one star experience. You’re never using us
again. So a five star experience is you knock on the door, they open the door, they let
you in. Great. That's not a big deal. You're not going tell every friend about it. You might
say, “I used Airbnb. It worked.”

So we thought, “What would a six star experience be?” A six star experience: You knock
on the door, the host opens. “Hey, I'm Reid. Welcome to my house.” You’re the host in
this case. You would show them around. On the table would be a welcome gift. It would
 be a bottle of wine, maybe some candy. You'd open the fridge. There's water. You go to
stories the bathroom, there’s toiletries. The whole thing is great. That's a six star experience.
1 year ago You'd say, “Wow I love this more than a hotel. I'm definitely going to use Airbnb again. It
today you worked. Better than I expected.” What's a seven star experience? You knock on the
watch such door. Reid Hoffman opens. Get in. “Welcome. Here's my full kitchen. I know you like
and such surfing. There's a surfboard waiting for you. I've booked lessons for you. It's going to be
an amazing experience. By the way here's my car. You can use my car. And I also want
to surprise you. There’s this best restaurant in the city of San Francisco. I got you a table
there.” And you're like, “Whoa. This is way beyond.”

HOFFMAN​: Adding stars clearly excites Brian. It took some time to run through this mental
exercise. We’ll skip ahead to the ten star experience.

CHESKY​: So what would a ten star check in be? A ten star check in would be The
Beatles check in. In 1964. I'd get off the plane and there'd be 5,000 high school kids
cheering my name with cars welcoming me to the country.​ ​I'd get to the front yard of
your house and there'd be a press conference for me, and it would be just a mindfuck
experience.

So what would 11 star experience be? I would show up at the airport and you'd be there
with Elon Musk and you're saying, “You're going to space.” The point of the the process
is that maybe 9, 10, 11 are not feasible. But if you go through the crazy exercise of keep
going, there’s some sweet spot between they showed up and they opened the door and
I went to space. That's the sweet spot. You have to almost design the extreme to come
backwards. Suddenly, doesn't knowing my preferences and having a surfboard in the
house seem not crazy and reasonable? It's actually kind of crazy logistically, but this is
the kind of stuff that creates great experience.

HOFFMAN​: But how far do you go toward the 11-star experience? To create the nirvana
product, all successful entrepreneurs, at some point, ​have​ to come back down to earth.

CHESKY​: There's really two stages of a startup's product. The first is design a perfect
experience and then you scale that experience. That's it.

HOFFMAN​: But which part of the perfect experience do you scale? The most ambitious
entrepreneurs—let's call them the Elons, after my friend Elon Musk—probably get there through
raw energy because they're convinced they need to solve a problem, and the unscalable thing is
one step they have to push through on the way. The Elons say, “I’m going to Mars. But first I've
got to solve this problem right in front of me.

First I need to get the rocket launched, and I need to have a business model for that first rocket,
and that looks like satellites. OK. I'm going to try satellite launches. And how do I get my first
 rocket? I need to create a scalable rocket platform, but unless I get the first rocket up, it doesn't
matter. And you work back to that.

Then you've got folks like Brian who say, “I realize that to get to this awesome experience, I
have to ratchet back to something that still ​seems​ like magic, but is totally doable. And then I
need to design the elements that get me into the totally doable thing.”

So how did Brian decide on the doable thing? He settled on a service with the appropriate level
of magic, and started building it. And—here’s the next thing to notice: They didn’t launch
perfectly scaled services. They built everything by hand.

CHESKY​: We had a saying that you would do everything by hand until it was painful. So
Joe and I would photograph homes until it was painful, then we get other photographers.
Then we’d manage them with spreadsheets until it was painful. Then we got an intern.

ELLIE THIELE​: I don't think I knew how anything would grow to the level that it did.

havenmo HOFFMAN​: That’s Ellie Thiele. She’s the intern who managed those spreadsheets. She still
ney works at Airbnb.
kubernete
s THIELE​: Very manually, I would email the photographer and the host and connect them.
scala The photographer would then send me the photos. I would go through each one giving
feedback if they needed to be retouched. Then I would manually upload them to the
host's website, their listing, one by one. It would take hours to upload. Multitasking was
the name of the game.

CHESKY​: And then we’d automate the tools to make her more efficient.

THIELE​: And we kind of looked at this and we said OK what is the easiest thing that we
can automate. Any little thing that changed was quite a shift in what I had been
doing—but for the better.

I remember one day. Brian would come to me at the end of every day. “How many did
we get, how many photos were shot?” And it was like, “Oh gosh. I have to go through
and count all of these.”

CHESKY​: Eventually a system does everything. We built a system where now the host
comes, they press a button, it alerts our system which goes to a dispatch of
photographers, so it’s all managed through technology. They get the job, they market
through an app that we built, and then payment happens. The whole thing is automated
now.
HOFFMAN​: Note how they gradually worked out a solution. They didn’t guess at what users
wanted. They reacted to what users asked for. Then they met the demand through a piecemeal
process. And here we come to the true art of doing things that don’t scale. It’s not just a crude
way of succeeding on a shoestring budget. It also gives your team the inspiration and urgency
to build the features that users really want.

I’ve seen this handcrafting story play out over and over again with entrepreneurs. Take my
friend Patrick Collison. He’s the founding CEO of Stripe, an online payments company. Today,
thousands of businesses use Stripe to process payments from their online customers. But in the
early days, they were a scrappy start-up. And Patrick paid close attention to his users. ​Very
close attention:

PATRICK COLLISON​: We had a chat room where we would help customers with
whatever issue that they wanted to ask about. We were very distressed after a while to
notice that occasionally people would come into the chat room while we were sleeping
and ask questions, they wouldn't get any response. So we wrote a bot that would page
one of us if somebody asked a question they didn't get a response after 30 seconds,
would groggily, bleary eyed, wake up and help them and go back to sleep.

HOFFMAN​: So in addition to being CEO, Patrick had become Stripe’s bleary-eyed customer
service rep. Frustrated users would page him at all hours.

COLLISON​: It sure did not feel glamorous—tapping away on my laptop for half an hour
in bed.

HOFFMAN​: Actually it reminds me—I don't know if you know Paul English who founded
Kayak.

SIRI​: Kayak is an online travel service that finds the lowest available rates across
different websites.

COLLISON​: We know each other a little bit.

HOFFMAN​: Paul for a number of years in Kayak had his cell phone number as the
customer service number.

COLLISON​: There was someone at Stripe who did exactly the same thing.

HOFFMAN​: Now it’s common for entrepreneurs to swap stories like this. And I think it’s worth
dwelling on these early days of handcrafted work, because most entrepreneurs tend to have a
funny reaction to these experiences. They may laugh about it later. They may call the work
unglamorous. They may celebrate the day they could hire a helping hand or automate these
chores out of existence. But thoughtful founders will never say, “What a complete waste of
time.” They’ll often look back on this period as one of the most creative phases of their careers.

Nancy Lublin, for instance, scrappily launched an international non-profit from her New York
City apartment. Her organization, Dress for Success, started as a clothing drive for women who
needed to walk into a job interview looking sharp and feeling confident. Nancy stockpiled
sweaters on her bed and jewelry in her refrigerator. And soon she was inviting volunteers into
her apartment for informal training sessions.

NANCY LUBLIN: ​So people start hearing about Dress for Success and would contact
me, random people would contact me and say, “I want to start this in St. Louis. I want to
start this in Hartford.” I would say, “Great, you want to come stay with me?” People,
literally strangers, would fly from St. Louis and stay on my futon, my college futon in my
tiny, law school apartment in New York and I’d be like, “How can I help?” I would send
them postcards saying, “Don’t give up. I know it’s really hard. You’ve got this.” I just killed
them with kindness.

HOFFMAN​: Today, Dress for Success has affiliates in 145 cities worldwide. But let’s be clear:
The transition from the handcrafted phase to the massive scale phase is a challenging one. And
I want to dispel any illusions that you can switch from one to the other with ease. In fact, it
requires two opposing mindsets. You have to fully empathize with a single user. At the same
time, you have to worry about everyone. I like the way that Brian describes the difference.

CHESKY​: The designing of experience is a different part of your brain than the scaling
your experience. It's a different skill set. The scaling experience is a highly analytical,
operations oriented, and technology oriented problem. The designing of experience is a
more intuition based human, empathetic, end-to-end experience.

HOFFMAN​: One parallel might be writing and editing. So the handcrafted phase tends to be
more like writing: It's a more inventive and creative process. Whereas the scaling phase tends
to be more analytical. It’s more like being an editor. At that point you tend to do more pruning.
You realize: “Well this whole thing is magical. But if we focus on this 20 percent, we get 80
percent of the magic.” So you prune. You compact. You distill. And you architect, so it can now
run at a rocketship rate. You’re transitioning the product or service over to a scale organization
that can now run it. The organization needs a simple plan with very few errors and very little
improvisation.

Now you might think the first step—design the ideal user experience—drops away as soon as
your product goes viral. Then comes the glamorous work of expanding to new countries and
thinking about your strategy in the years ahead. Handcrafted work is essentially a kind of
booster rocket that helps you get into orbit, but it’s not the rocket for the whole trajectory. It gets
you out of the gravity well. And after that, get ready to slingshot around the world.
 CHESKY​: We became an international company. Then in the middle of 2011, we raise
money, we’re this billion dollar valuation company.​ ​Then in summer 2011, a woman's
home got trashed. Then we had to go to the next step which was: we are just this little
company in our apartment, but as far as the world's concerned, we have a giant office
building and we better be grownups.

So we had to build 24/7 support, had to have more secure payment instruments, we had
to add a trust and safety team, we had to verify people's identity. We realized we had to
get our money transmission licenses. So then there's this whole administrative
bureaucracy that gets added. Then 2012 we get to the point,​ ​where we have 50, 100
employees, and we have no executive team. There's no management, there's no
company meetings, and there's no communication so no one knows anything, literally
nothing.

I don't even know how we ran the company. So I instituted some basic things like I have
to have an executive team. And then the lawsuits come in and you have to really sort it
out. Unfortunately we're not regulated at the federal level. We're regulated at the city
level and every city is different. They’re like, “I see what you did in Paris but here in New
York we're different.” So you had to go city by city and you've got to hire those people to
really triage and deal with all these issues. It's like a videogame. You slay a dragon. You
think you've completed the board game, and then you have the next level and all of a
sudden the dragons get really big.

HOFFMAN​: When you’re slaying dragons, it’s hard to hold on to the handcrafted mindset. Still, I
would argue that the sharpest founders never fully abandon the mindset, no matter how big their
company gets. The organization will start having ​antibodies​ against new handcrafted things. It’s
a response that protects organizational efficiency. It says: “Look, this new thing? We can't get it
to scale. It won't operationalize. It won't fit within our process.”

The reason that scaled companies have a hard time with this handcrafted process is all in the
list of objections about why this won't work, why this shouldn't be integrated as part of the
company. And so what you need to do as a founder is to be extremely choiceful of which
handcrafted innovation you choose, and how you protect it organizationally. You need to protect
it because the natural reaction of the scale organization will be to kill it. He wanted to reinvent
the industry again, and he knew he had more to learn about the travel experience in order to do
it. So he turned to Hollywood for help.

CHESKY​: I often find that to reinvent an industry, you do not take inspiration directly
from that industry, you need to look at orthogonal industries. For us the orthogonal
industry for travel was cinema. The best trips you've ever seen are the trips that
characters in movies have and we would provide that analogy in real life. I actually
literally hired a storyboard artist from Pixar. We had him storyboard the perfect Airbnb
experience. When we did that we realized there was this two hour movie and only
 20-minutes were in the home. There was all this leading up to the home, getting the
airport, going around, going to dinner, or hanging out with friends out and about. Most of
the trip was not in the home.​ ​We realized at that point, we need to be the end-to-end
business of travel. So the same way that we did things that don't scale,​ ​we called it
“magical trips.” We decided let's find one traveler and create the perfect trip for them.

HOFFMAN​: Notice how quickly Brian turns his attention to a single traveller. In an instant, he
switches from global concerns back to his artisanal roots. That’s because he’s building
something radically new here. He wants to scale the perfect trip. But what is the perfect trip?
What are the essential ingredients that make a vacation truly memorable? It’s a question Brian
can’t even begin to answer until he delivers that experience to at least one person. You’re about
to get a master class in handcrafting.

CHESKY​: We put up these flyers anonymously saying, “Seeking a traveler. We’ll

photograph your trip to San Francisco if you let us follow you.” This guy Ricardo replied.
He was from London. We sent a photographer around him while he was just travelling in
San Francisco. What we learned was his trip was awful. He'd show up, he'd go to
Alcatraz by himself, put on the headset, and then he’d go to Bubba Gump Shrimp. He'd
stay in a budget hotel. He'd go to a hotel bar by himself, sitting with a bunch of dudes at
the bar but he doesn’t talk to anyone because he was introverted.

We call him back. We said, “Ricardo, we want to create the perfect trip to San Francisco
for you.” We fly him back. We had the team storyboard the perfect experience for Airbnb.
We had a driver pick him up at the airport. We took him to the perfect Airbnb, there are
all the services. He went on these dinner parties, we got him the best seats at
restaurants. We took him on this midnight mystery bike tour. Sixty riders go on it and
nobody but the leader knows where it will end up. There was this crazy magical world.

I see him at the end of the trip. I say, “How was your trip?” He says, “It was amazing.”
And then I walk away. He yells at me. “Brian, one more thing.” He starts crying. He
breaks down, he says, “Thank you. This is the best trip I've ever had.” I was like, “Oh my
God. I guess it worked. It really moved him.” I don't think anyone ever tried to design an
end-to-end experience for somebody like they're in a movie before and we did it. That
became a blueprint. We said we are confident on an unscalable basis that we know how
to create a trip that deeply moved somebody that’s better than anything they've ever
experienced. The question is: Can we develop a technology that scales and do it 100
million times?

HOFFMAN​: Notice here how quickly Brian switches back to the analytical mindset. He can
extrapolate from a single journey to a list of essential ingredients. Here is his systematic
breakdown of the perfect trip.
 CHESKY​: When you first go to a city you need a welcome event within the first 24 or 48
hours where you’re around people. When you land, you need to get acclimated to the
neighborhood. By day two or three you need to have a challenge out of your comfort
zone. If you do not leave your comfort zone, you do not remember the trip. If you can
belong out of your comfort zone and something new happens to you, then there's going
to be a moment of transformation where the person you were in a small way dies and a
new better version of yourself is reborn.

Now this is the narrative of every movie you’ve ever seen. A main character starts in an
ordinary world. They leave their ordinary world. They cross the threshold to new, magical
world where all these obstacles happen and they overcome something. They call it the
hero's journey. We applied this to trips, built a small team and we spent the last couple
of years figuring out how to scale this, and this has led to what we have today which we
call “Airbnb Trips.”

HOFFMAN​: In November of 2016, Brian unveiled 500 trip packages in 12 cities. And now he’s
fully in the scaling mindset, figuring out how to expand the service to new destinations. But as
Brian will tell you, he misses the handcrafted work. He has a surprising message for
entrepreneurs who have only a handful of users to serve.

CHESKY​: I tell a lot of entrepreneurs who don't have traction,​ ​I miss those times. Yes,
it’s exciting to have traction, to have a company that’s huge scale, but the biggest leaps
you ever get is when you're small. Another way of saying it is, your product changes less
the bigger you get because there's bigger, more customers, more blowback, more
systems, more legacy.

The most innovative leaps you'll ever make, especially if you’re a network, are going to
be when you're really, really small. You can change the product entirely in a week. Try
doing that at LinkedIn or Airbnb today. That would be a huge disaster. So I think taking
advantage of that subscale, designing the perfect experience, asking yourself what you
can do, is amazing.

HOFFMAN​: And if you have a tiny startup, I have good news for you. Now is the moment you
can take the most daring leaps of your career. Dream big. And act small. Pay passionate
attention to your users. ​Handcraft​ the core service for them. Create a magical experience. And
then figure out what part of that magical handcrafted thing can scale.

I’m Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Caterina Fake

CATERINA FAKE:​​ You are the framer. You are the framer of the Constitution in this
world that you are building. You are the Abraham in the series of begats.

REID HOFFMAN: ​That’s Caterina Fake. She’s the co-founder of Flickr, and arguably the
Abraham of social media. Flickr begat a whole series of innovations that would shape the way
we use social media.

Back in 2004 — which is basically biblical times in Silicon Valley, Flickr was home to a tiny tribe
of people who started sharing their photos online. Photo sharing begat the idea of “followers.”
Followers begat activity feeds. Activity feeds begat more followers. And then bots pretending to
be followers. It’s actually astonishing how many conventions of social media were begat by
Flickr.

And when Caterina looks back through that long series of begats, and beholds her creation,
what does she say?

FAKE:​​ These products have come to be called social media. But that’s not what Flickr
was.

HOFFMAN: ​I know plenty of people who would love to take credit for the genesis of social
media — even partial credit or accidental credit. Caterina, however, doesn’t want to take any
credit at all. Social media, to her, is like an alien that burst out of Flickr’s stomach.

And to anyone who lumps Flickr together with Facebook, Twitter or Instagram, she wants to
make one thing clear: That was not what she was trying to beget.

FAKE:​​ It was an online community. The reason that they called it social media is
because you can sell media. You can sell column inches, you can sell broadcast hours.
You can advertise against it, but it was not social media. That’s not what it was. It was an
online community. And that meant that everybody who was there was not marketing.
They were having conversations. They were known to each other, and they were being
part of the community they were participating. And so, that is the spirit under which Flickr
had been conceived.

HOFFMAN: ​If anything, Caterina is no longer the Abraham of social media. She is the Noah,
moments before the flood. What she sees in social media today is a corruption of the online
communities she hoped to see blossoming across the web. To fix them, she says, you almost
have to start over. Go back to the founding principles.

And this doesn’t apply only to what we call “social media.” There are many communities online:
Marketplaces. Crowdfunding platforms. Content sites. And many of them are thriving, because
they recognize, as Caterina does, that what you’re creating is a civilization. You are the framer,
the giver of laws, the establisher of norms — and the way you lead your first generation of users
will shape how they lead the next generation and the next.

That’s why I believe every founder of an online community has to shape the culture from day
one, because the tone you set is the tone you’re gonna keep.

[Theme Music]

HOFFMAN: ​I’m Reid Hoffman, co-founder of LinkedIn, investor at Greylock and your host. And I
believe every founder of an online community has a responsibility to shape the culture from day
one, because the tone you set is the tone you’re gonna keep. Your first users and the tone of
their first interactions — will set the norms for the entire civilization.

Maybe you don’t think you’re on an online community. Maybe you think you’re a platform or a
marketplace or social media. Maybe you think you’re a commerce site with reviews, or a content
site with comments. I have news for you: those are all online communities. And given the year
we all had in 2017, we all have a lot to learn.

And I say this recognizing that no site or platform can 100 percent control what its users do —
particularly when they run in the millions to billions. Some of them will run amok. Count on it. But
that’s all the more reason to put guardrails in place, before it’s too late.

Those early users are a bit like a primordial amoeba — just moments before it evolves into a
more advanced life form. Lightning strikes, and what crawls out of the muck is anybody’s guess.

What you can control, however, is the climate in which this microscopic community evolves. You
can make it hospitable to good behavior or to bad behavior. You can get the troll-like creatures
to shrivel up and die. Or you can let them grow to grotesque proportions and lord it over
everyone.

One rule of scale: Take a really close look at what you are, the good and the bad.

And if there’s anyone who believes founders can and must shape their communities — it’s
Caterina Fake. I wanted to talk to her about this, because she played a key role in shaping so
many iconic companies that set the standard for what an online community could be. Her first
company, Flickr, launched many of the conventions now common in social media. It’s hard to
overstate the influence she has had.

She also played a role — as an investor, advisor and board member — in shaping many other
iconic online communities. Companies like Etsy, Kickstarter and Stack Overflow, which
expanded our very definition of what an online community could be. Her eagle eye for the seeds
of communities that can scale — have made her an impressive investor.
Caterina’s fascination with online communities began as a teenager in the 1980s. Back then,
the internet was like a gathering of ham radio enthusiasts who were tuning in and out of each
others’ conversations. Caterina had dabbled with computers and early chat rooms. But what
hooked her was a long-distance connection around a shared passion.

FAKE:​​ The real thing that got me interested in it was I was really into Borges.
Jorge Luis Borges, the Argentine writer, who in many ways predicted the internet.

HOFFMAN: ​We asked Caterina to select her favorite passages from Jorge Luis Borges, and
you can find them on our website, Masters of Scale dot com. But if you have no familiarity with
Borges — you’re not alone. In fact, you’re in the majority. It’s the Borges fans who are more
likely to feel alone, which is exactly what drew Caterina to a primitive chat room of fellow fans.

FAKE: ​I found a group of scholars in Denmark who were Borges scholars online. And
then I contacted them. And this was over BBSs, or Waves. I don’t even remember how
we were getting in touch with each other. But this was back kind of pre-web, and we
were having all of these fascinating conversations across the world. And this to me just
was astonishing. I was, you know, this New Jersey kid in Reagan America, and you
know, a bit of—a bit of an oddball, interested in all these peculiar things in a football and
cheerleading town—it was a revelation. It was amazing.

All of these people who were intelligent, interesting, fascinating, liked the same things
that I did that didn’t live in Morris County, New Jersey were suddenly people that I could
be in touch with.

HOFFMAN: ​Think about it: She felt more at home online than she did in her actual hometown.
This is the power of an online community writ small.

Notice how she can’t even remember which tool she used for communication. To Caterina, the
tool is an afterthought. What sticks out in her memory is the conversation, the connection she
forged with her fellow users. And this deep-seated appreciation for these very human factors is
one of the things that sets Caterina apart from so many other entrepreneurs and investors.

A lot of founders — especially the tech entrepreneurs — tend to think of the tool they want to
build, as opposed to the community. The primary paradigm tends to be: Here is the tool. It’s a
hammer, it’s a screwdriver. I give it to users to do a specific thing. And then the the secondary
thing tends to be: Here is the interface. How can I modify it to make that behavior addictive?

You can see it in the craze in Silicon Valley for A vs. B testing. When a programmer says, “See,
when the button is red and jiggles a little bit, you click on it a lot more!”
But Caterina doesn’t fight for clicks — she fights to create that homey feeling she first
experienced in the Borges message room. The connection between people. That’s what she
hopes to scale. She has a passion for human interaction that’s not exactly typical in Silicon
Valley.

So how did Caterina, the Borges fanatic and liberal arts graduate, wind up in Silicon Valley? It
was a logistical error, actually. She got waylaid on a trip to the Himalayas.

FAKE​​: I was on my way to climb mountains in Nepal. I was on a mountaineering

expedition and decided to stop off and see my sister. And then my trip got canceled. So,
I stayed in my sister’s spare bedroom. This was back when San Francisco, actually, you
could have a spare bedroom.

HOFFMAN: ​For those of you who do not live in San Francisco, the cost of living has gone way
up. A spare bedroom is hard to find.

FAKE: ​And then at some point, she said, “You know, have you ever thought of getting a
job?”

I was an artist who moved here from New York. My resume did not appeal to employers,
which was fine, because actually, I never really sought employment. You know, this kind
of probably a very common thing with entrepreneurs, is that I distinguished myself and
my unemployability.

And as a result, had to find my own way and build my own companies. And this is
something that you can do if you have initiative, if you have freedom, and if you also
happen to show up in San Francisco in 1994.

HOFFMAN: ​Back then, Silicon Valley was a Wild West of job opportunities. Caterina hopped
from one startup job to the next, picking up new skills along the way. She worked for a CD-ROM
company, a research lab. All the while she held fast to one enduring truth: People loved to
connect online.

Her first entrepreneurial venture was an multi-user game called Game Neverending. If that
name rings a bell, congratulations — you’re clearly listening to this show carefully. A previous
guest, Slack’s Stewart Butterfield worked on the very same game. You might recall how that
early venture fared.

FAKE:​​ It did not take off. And we went through that miserable, miserable march, where
you just go from investor meeting, to investor meeting, to investor meeting, and you just,
just pile up rejections. It’s a miserable march. I have been on that march. That march is
not fun.
HOFFMAN: ​You can hear all about that miserable march on the Masters of Scale episode
called “The Big Pivot.” I want to focus, instead, on its happy ending. There was a buried feature
in the game that let players share photos and leave notes for one another. A conversation
emerged. A community formed. And that photo sharing system would eventually form the
foundation of Flickr, a service that did nothing short of rewrite the way people interacted online.

Remember that bolt of lightning that strikes an amoeba and creates a new lifeform? This was it.
And it would grow faster than anyone could have predicted.

Flickr would pave the way for every social site that would come after it, like Facebook, Pinterest,
Instagram, Snapchat. They introduced conventions like tagging and “following” — that are now
deeply woven into the fabric of our online relationships. And if you ask Caterina, there were two
hidden secrets behind Flickr’s success.

FAKE​​: Bill Gross at Idea Lab did this research where he looked at all of the different
companies, 200, 300 companies that he had invested in over his career, and tried to
figure out what it was that made them so successful. Was it execution? Was it the
market? Was it their financing? Was it their team? What was it? And it turned out that it
was their timing, and that they had found a parade and gotten in front of it.

They had found larger societal and cultural movements that were happening. And if you
look at when we started Flickr, we started it in 2003. More than 50 percent of all cameras
were shipping with digital phones. And nobody had any idea where to put these
photographs. And so, Flickr was born at exactly the right moment.

HOFFMAN: ​So their timing was impeccable. But it wasn’t the only secret to their success.
Caterina did more than just get users to click the “upload a photo” button. She shaped their
conversation. From day one, she volunteered to greet each and every new user on
Flickr...personally.

FAKE:​​ Flickr was, as I said, an online community, and not social media. And all of us
participated in it. You’re building a civilization. You are the person who actually,
everybody is taking the lead from. Whatever values, whatever the mores are of the
platform, of the community—we say this, and we don’t say that. We have a custom of
greeting people here.

HOFFMAN: ​These early interactions set the tone for everything that will follow. And in every
kind of community — from a company to an online photo-sharing site — culture cements very
quickly. It’s critical to get in front of it. But that’s not to say it’s easy.

FAKE​​: In the very beginning of Flickr, each of us, you know—we were a team of five or
six people—were posting an average of 50 times a day in communication with our user
base. It was kind of like a remarkable amount of communication directly with the users.
HOFFMAN: ​Most founders would consider these social interactions “grunt work” and try to
automate them as quickly as possible — with bots or interns. But Caterina? She just keeps
engaging.

FAKE:​​ If you do that, and you do it well, and you do it, it will carry through. And then 500
people will be behaving the same way. And then 5,000 people will be behaving that
same way. And then eventually, 500,000 people will be behaving that same way.

HOFFMAN: ​Culture sticks. It’s hard to appreciate just how much it sticks. The tone you set from
day one — from the first greeting — is the tone you keep. Caterina understood this instinctively.
And as counterintuitive as it may sound, she knew it was worth her time as a founder to get it
right.

What really astonishes her is how quickly founders try to distance themselves from the
community they’re trying to build.

FAKE:​​ It’s very rare these days for there to be direct communication between
companies and their user base.

In fact, they’re seen as a customer service problem, eating up customer service hours.
And actually, most companies actually try to prevent you from getting in touch with them.
You know, they just can’t spend all of the time to kind of nurture each individual person.

HOFFMAN: ​Caterina understood instinctively not only the importance of cultivating a

community, but also the complexity. Have no doubt: Community-building is complex, and it’s
filled with traps. It’s not sufficient to simply say “hello” to new users and send them on their
merry way. Remember, you’re building a civilization. You have to lead by example. But — it will
only take you so far. Sometimes you have to assert your values at the risk of losing users. And
you may be surprised how quickly users test your values.

I heard a great example of this kind of test from my friend Joi Ito. He’s the director of the MIT
Media Lab, and a great champion of open, egalitarian systems online. He told me a story of
being tested by users — the kind of users we’ve come to call “trolls.” This story took place last
decade. But it could easily be last week.

ITO:​​ It started with a mailing list called NetSurf where we would all share our links about
the interesting websites that we’d found. And at some point, some slightly troll-like
people were hanging out on the mailing list. And I said, you know, you guys, this is like
my living room. Get out of here. Don’t behave like that. They said, this isn’t your living
room. I said, it’s on my server. They said, we don’t care. This is a public space. I can say
 what I want. And I thought, ah, that’s kind of weird, because I created it. I’m running it.
But all right, fine, whatever. I’ve lost control of this mailing list.

HOFFMAN: ​Giving up is one option. And later in the episode, Joi will share his latest thinking on
fighting trolls. Caterina, however, was a bit more vocal from the beginning. Flickr was tested
very early and very vocally by its users. And this shaped Caterina’s fundamental approach to
online communities: You have to know who you are, who you’re for, and what you stand for.

FAKE:​​ A very interesting case came up very early on in Flickr, which is that a great
number of the users were from the United Arab Emirates. And at the same time, Britney
Spears was ascendant with her bare midriff outfits. These two things were incompatible.
You know, the Muslim community did not like the bare midriffs photographs that were all
over Flickr. And we had to make a decision. And we came down on the side of the bare
midriff. We were like, the bare midriff is okay here. And that is the decision that we are
going to, from on high, are going to make. And many of the community members went
away.

HOFFMAN: ​This bare midriff issue may sound trivial. In fact, decisions like these are the
lifeblood of your community. It isn’t that any one decision is the right decision. You can imagine
other, flourishing communities coming down against the bare midriff. But you have to decide.

This is what I mean by creating a hospitable climate for certain types of behavior. Every founder
of an online community must grapple with it daily. If you’re not grappling with it — you’re living
with a false sense of neutrality. You’re actually allowing your most extreme users to make the
decision for you. Because in these cases, a non-decision is ​also​ a decision.

So, for example, early in LinkedIn we created a connections game. The number of connections
you have with other members was your score. We put that score front and center on your profile
so that people would play the connections game. It was an excellent way to drive user growth —
and we could have just let that game go on, ad nauseum.

There was just one problem: As users got a bit too hooked on the game — and inevitably, some
of them would — then that connection score would signify nothing. It would represent a
pointless tally of how many hands a user could shake a day. In fact, I remember one person on
LinkedIn who amassed 32,000 connections. There’s no way he knew 32,000 people. So we
capped the score at 500. After that, the score remained fixed and you got stuck with a boring old
“plus” sign. 500-plus. Game over.

The point is, we were aspiring to create a very real and specific social interaction. Your
connections on LinkedIn had to be people that you knew well enough to refer to other people
that you know. Anyone who’s ever attended a networking event will know how this can play out
in the real world. You’ll make superficial connections, where you just say, “Hey, I bumped into
you in the hallway and now we’re connected.” That was not the sort of interaction we were trying
to recreate on LinkedIn. Instead we wanted users to say, “Oh yeah, I met this person at a
conference. They seemed pretty interesting and solid. What they’re interested in seems to be
like something that’s interesting to you. So, here, I’m passing along the introduction.” That was
the conversation we aimed for. That was the conversation we designed for. And that we never
lost sight of.

That said, some small percentage of people started putting their total number of connections in
their headline because they wanted to keep playing the game. C’est la vie.

The point is, you need to imagine those interactions in vivid detail. You need a hypothesis for
how the community should behave, so you can model the behavior you want to see.

And as you see that good behavior emerge, you’ll have clarity about the way forward. You can
set the guardrails that keep interactions from veering off course in the often unpredictable ways
that humans can.

Caterina always had a clear idea of how people should engage. And this helped Flickr grow
quickly and civilly into a platform with remarkably few trolls among a remarkably large user
base. In March 2005 — less than a year after their pivot — Flickr sold to Yahoo. And Caterina
found herself, for the first time, with both money and time to pursue what she loved. And what
she loved — as much as community and art and Borges — was entrepreneurs. She started a
parallel career of angel investing, in early stage companies — especially ones that had all the
signs of a flourishing, fledgling community.

FAKE: ​A very strong motivating force in all of the work that I have done has been
building a more human internet, building a very thoughtful people-oriented internet. If
you look at the companies that I subsequently invested after Flickr, they have a lot of
things in common. Etsy is a very strong example of that. It's a very community-oriented
product. It's very person to person. It's very human.

HOFFMAN: ​Etsy. The marketplace for small scale artisans selling homemade goods, from
quirky ceramic mugs to whimsical fuzzy socks. The company went public in 2015 with a
valuation of roughly $3.5 billion. Revenue in 2016 was north of $350 million. But in 2005? It was
a different picture. They had around 2,000 users, a few staff members, and a dream.

FAKE​​: Some of the people that I’ve invested in, including, for example, Rob Kalin of
Etsy, just had a story. They had nothing. And Rob had had no prior work experience at
all. Zero. He was a college student.

HOFFMAN: ​A college student who wanted to create a marketplace for home-knitted hats. It was
not an obvious win. But Caterina saw something that others — including me — missed.
 FAKE​​: Etsy, to me, was a—I loved it immediately. And I actually brought it to you. I don’t
know if you remember.

HOFFMAN​​: I do remember. It was one of my regrets.

FAKE​​: And your, your comment was, “So, let me understand this. This is a bunch of
women knitting sweaters and then putting them into a marketplace.” And I was like,
correct. Not only is it that, but it’s a movement. It’s this sort of rebellion against big box
retail, and people want their soap to come from a grandmother in Peoria. They do. It’s a
kind of a—it’s a way of life.

At the time, it just—it kind of seemed ludicrous. Like really, people are making tassels in
their bedroom? And—

HOFFMAN​​: Yes.

FAKE​​: And this is gonna be a big business? How?

HOFFMAN: ​I told Caterina that I regretted passing on Etsy, and I do. What I missed about it
was this...

It was pitched as handmade goods. Literally handmade goods is the opposite of scale. I mean I
can hire a bunch of people maybe to make handmade goods, then it's kind of a factory and
“how many can they make? How do you grow your business? How scalable is that?

It's a little bit like are you creating the corner bookstore or are you creating Amazon, right? Are
you creating, the gourmet chocolatier which is really cool or are you creating Godiva or Nestle,
right? I was kind of like well that's cool but it isn't really good investment.

My mistake was not realizing that once you get to a network connected world that what
business people call TAM, total addressable market, isn't significantly higher than you think.
Because like, for example, I was going well, is it just like the gourmet chocolate store in San
Francisco? It was like no, no, because it's an online marketplace it's the gourmet chocolate
store in every city, each different, and you get a piece of them. And I would have gone oh,
actually an early stage investment in that might actually be reasonable.

So part of the mistake was, when she presented to me it was before it was venture invested,
right? I could have put in money essentially as an angel. I don't know what Etsy's valuation is
today, two billion dollars, something like that. That would have been a, probably 50X
investment, oops. Maybe 20X, oops.

But this latent potential is what Caterina saw from the start. I asked her about it…
 HOFFMAN:​​ When you were looking at Etsy as part of this, what made you see that in
this marketplace, there was something that could sufficiently scale into a breadth of
humanity? What made you look at Etsy and go, this isn’t just a knick knacks thing. But
actually in fact is a part of a, a handmade or a custom-made revolution.

FAKE​​: One of the things that was missed was that it was a principally female
marketplace, right? And at the time, it was 2005, 2006. There were a few examples of
that. But Etsy was also a market that appealed to a certain kind of semi-countercultural
group.

HOFFMAN: ​Caterina called this one right, because she was looking for different markers than I
was. She saw in Etsy the start of a counter-cultural movement. A movement that placed value
on the home-made, the artisinal, the local. It was another parade she could get in front of.

FAKE: ​There is definitely something to be said for positioning yourself as outside of

something, or as counter to something. It gives you a stronger sense of identity. I stand
for this, and I'm not that. I'm not big box retail. I'm not Walmart. I'm not Target. I'm
handmade soaps by grandmas in Peoria.

HOFFMAN: ​Etsy also showed all the signs of a community that could thrive. When Caterina
took a close look at those first 2,000 sellers, what she saw was not just willing merchants, but
passionate community members.

FAKE: ​They were very passionate. It had forums, in which all of the people were
mutually supporting each other.

They were forming their own sales groups. You could see that the activity in it pointed to
all these like really interesting behaviors that sort of surprised you, that you didn’t expect.
You know, this unbelievable level of collaboration. Aren’t these people competitive? No,
they were collaborating with each other. It was this sort of amazing kind of strange thing.

HOFFMAN: ​Caterina served as Etsy’s board chair for eight years, and was intimately involved
in growing the company. Her eye for community offered foundational insights. She knew that for
Etsy to thrive, the founders had to include the community in decision-making.

These weren’t the trolls on Joi Ito’s mailing list. But rather, passionately devoted community
members who had a real stake in what happened inside their civilization. And that’s an
important distinction. It’s critical to recognize the difference between members who care about
the health of the community, and those who only care about themselves. When you recognize
these members, you see the early signs of scale.
And this comes back to the theory: What you are when you’re small, gets amplified when you
grow. The Etsy leadership knew they had to water these seeds of collaboration — by including
the community in key decisions and fostering the connections between them.

In the early days, these decisions helped Etsy stay true to its home-spun culture. And they also
played to an advantage Etsy had in the commerce world. Rather than competing, the sellers
were collaborating. Another sign that this commerce-driven community would have the
self-propelling power to go the distance.

FAKE:​​ In the very beginning, a lot of the customers of Etsy were actually also the
sellers, so they were buying from each other, and it was this positive feedback loop. It
was constantly feeding into itself, the happy seller becomes the happy buyer, and then
invites their friends, and then gradually expands in this fruitful way. If you're building a
movement, a community, a culture, it kind of just happens organically.

It's rare, and very few people can pull it off, but you know it when you see it, and I think
customers know it when they see it too.

HOFFMAN: ​Caterina clearly knows it when she sees it. In 2009, she made another bet that had
other investors scratching their heads.

FAKE:​​ I invested in Kickstarter when it was a PowerPoint deck. They had nothing.

HOFFMAN: ​Kickstarter. The crowd-funding platform that lets fans fund projects by artists and
makers. It sounded unlikely at the time, but it would go on to fund nearly 150,000 projects, to the
tune of 3.5 billion dollars pledged. What initially drew Caterina was what this community of
communities could mean to the world.

FAKE:​​ I grew up wanting to be a writer or an artist, and nobody in my family thought that
that was a viable career choice for me. They were like, "No, you'll be a starving artist.
You won't be able to support yourself." And so I lived with that, and of course I tried. I
went to art school. I was living on like $9 an hour working as a painter's assistant.

And I struggled as an artist. And then, to hear about these companies, Etsy, and
Kickstarter, as these ways in which these people who have this inspired creativity, would
actually have the possibility of making their work possible, that's huge. It's a dream. It's
blue sky. It's a magical outcome. I think that was what ended up getting me involved.

HOFFMAN: ​Caterina would go on to found and invest in many companies, drawing impressive
returns. Her latest venture is an investment fund — with her partner Jyri Engestrom — called
Yes Ventures. They’ll specialize in seed and pre-seed investments. And yes, you can predict
that cultivating communities, broadly defined, will be at the center of what they do.
And her investments that interest me the most are the ones I never would have made myself —
because they’re just too far outside the area of my expertise. I asked her about the one that’s
the farthest out for me. It was another investment in a passionate community — but of a totally
different sort.

HOFFMAN​​: What was your vision of the possibility in Blue Bottle? How did you see it as
something that could interestingly scale into being a great product and a great company?

FAKE: ​You could see that there was this incredibly strong culture, and a very strong
seed had been planted. It had that very human element. It had that mystique. It had a
creation myth. It had this eccentric location in this alley, and there was something about
it that you felt was true, that was real, that was not contrived, was not grafted on
marketing speak and inauthenticity. It was real.

HOFFMAN: ​Blue Bottle was valued at over $700 million, with 50 locations worldwide. And the
customers? They’re as passionate as ever. So once again, you can see how the earliest
interactions with users, or customers, sets the tone for the community as it grows. Whether it’s a
physical store or a virtual community, the same principles apply. And when something goes
awry, you can place a pretty good bet that what went wrong — went wrong early on.

Caterina sees a lot that’s gone wrong with today’s social media platforms. But the biggest
problem, she says? They don’t know who they are.

FAKE​​: This is a very controversial position, because a lot of my colleagues in building

these kind of like social platforms don’t believe this. But I do. Which is that, I believe that
your moral compass, the things that you believe, and these systems are so big that they
are trying to encompass all. And I think that that’s why they’re failing. And I think that one
of the things that Heather Champ, who is a community manager, the first community
manager on Flickr says—one thing she says repeatedly is that what you tolerate is what
you are. So, if you tolerate white supremacists on your platform, you’re a platform for
white supremacists. And you just have to accept that. And that unless you draw the
lines, unless you say what is and is not acceptable on your platform, it just becomes a
disaster.

Because you want to be part of a community that share your values. And you don’t share
values with white supremacists.

HOFFMAN: ​I generally agree with Caterina. In the case of Flickr, they tolerated the bare midriff
and they welcomed the Britney Spears fans. But they drew a bright red line at white
supremacists.

And the truth is, every founder of an online community tends to draw lines like this — in their
heads. They just tend to get a bit sheepish about stating them aloud — and with good reason.
There is a standard way of thinking about this in Silicon Valley, which argues that large online
platforms are inherently objective, and do not have values of their own. I think this is incorrect.
All platforms are in fact value-laden. The question for a very large platform then becomes: How
do you create a set of values that has a kind of a shared objectivity?

For example, on the Facebook side, they say, “Well, what people click en masse demonstrates
their actual preferences, what they actually like. And so, we have a democratic platform that
promotes what people click on. It’s a reflection of actual behavior and preferences.”

You might reply: “Well, if you let that run wild, we would all be clicking on the seven deadly sins
all the time.” Whether it’s nude pictures, hate speech, a photo of a baby cheetah sitting on your
new Maserati — and that’s real, by the way. Look it up on Rich Kids of Instagram, if you don’t
believe me. Anyway, the list goes on. We know that those are our triggers, and we don’t want to
be collectively reduced to our basest instincts. We don’t want to become a quivering mass of the
seven deadly sins.

On the other hand, when people say, “Well, you know, Facebook should have human editors!” I
think, “Oh? Human editors? And they’ll decide what the 2 billion people who use Facebook
today should and should not see? Who are these trusted supervisors who will oversee
Facebook’s ministry of truth?”

So it’s a tricky question. I’m not sure I know where to strike the balance between editorial
anarchy and Orwellian control. The question has actually dogged the creators of online
communities since the invention of the internet, as my friend Joi Ito observed. He’s been
thinking about the problem of Internet trolls since he launched that mailing list he told us about
earlier.

JOI ITO:​​ What’s complicated about trolling is that, well, first of all, it’s been around
obviously from the very beginning. And some trolling is actually funny, and I troll people
as well, so there’s sort of really horrible trolling, and then there’s sort of just mildly
annoying trolling.

HOFFMAN: ​When you think about it, online communities, like any civilization, are always
evolving. It is, after all, a living system. And Joi has the perfect analogy to explain why this battle
for a healthy community will never end.

ITO:​​ Maybe a good metaphor is bacteria or some sort of human health system, and how
you’re always constantly battling with pathogens. And some of it is your immune system.
Some of it is, you just power through it. Some of it, like the common cold, just still
happens. But there are deadly epidemics that occur, and we try to figure out systems.
 Sometimes the behavior will just run its course and kill a huge percentage of the
population. But then we’re resistant to it. And I think those metaphors are actually quite
strong. I mean, I think of ISIS as trolls, right? They’re really kind of in that category. And
the similarities in the microbiome, C. diff is a category of bacteria that when you get it,
you get massive diarrhea, and it’s a horrible problem. But you don’t fix it by taking more
antibiotics, which was the original thing. Actually doing a fecal transplant seems to work
better. And it’s by bringing a vibrant culture of healthy bacteria into the system. The C.
diff is still there, but it becomes a minor subculture rather than the dominant culture.

And so, for me, one of the ideas that I’m thinking about is how do you overrun bad
culture with good culture, and how do you do the online equivalent of a fecal transplant, I
guess? That doesn’t sound perfect. But roughly like that. And so, I feel like you fight bad
with good, rather than fighting bad with control or destructive forces.

HOFFMAN: ​Maybe it’s not yet the perfect analogy. Fecal transplants aside, what I find clarifying
about this analogy is that it shuts down the question, “How do we eradicate bad and ugly
behavior online?” That’s like wishing all of mankind will eventually behave like angels on earth.
It’s just contrary to our nature.

But if we reframe the question as, “How do we invigorate good behavior, so that it drowns out
the bad and the ugly behavior?” Then the solutions come into view.

First, invigorate the good behavior from day one. Make that the foundation of your community.
At the very least, you’ll have a wall between your first users and the barbarians at the gate.

Second, never tell yourself the battle for civility has been won. It hasn’t. It never will be. The
barbarians are coming. But if you arm your community with good tools, good manners and good
examples from day one... You’ll be ready.

I’m Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Daniel Ek

MILES DAISHER​​: It's a new sport called skyaking. It's super fun. I've landed a skyak in
front of about 60,000 people in Pittsburgh once, doing about 65, 70 miles an hour.
Coming in about to touch the water going, "It's too fast. It's too fast. Just keep the nose
up," – and skip, skip, skip, skip – "Yeah." My name is Miles Daisher, I'm a professional
parachutist, Eagle Scout, BASE jumper, and friend of the community.

REID HOFFMAN: ​I hope you’ve had your coffee today. Because Miles is high energy. In fact,
his idea of an early morning pick-me-up is to climb to the top of a really high place… and then
leap right off it.

DAISHER: ​In our sport, we're all a little type A. We're all a little hungry and just kind of
running around like, "I want to jump off this. I'm ready to do this." That's pretty much all
we think about when we drive around tall objects: "We could jump off of it. Over there on
the corner is perfect. Look at this landing area, it's great."

HOFFMAN: ​Miles has done over 8,500 skydives and 5,000 BASE jumps.​ ​But unlike the ancient
greek tale of Icarus, Miles is humble when it comes to his own knowledge. He knows that hubris
can lead to a downfall that could be literally deadly.

DAISHER: ​When you're flying a parachute, you're just dust in the wind. If you've got a
bad gut feeling about something, that gut feeling got you here. That's what made you
survive your whole life until now. Trust your instincts. Trust your gut. Sometimes it's good
to just back away from jumps.

HOFFMAN: ​It’s not just his own abilities that Miles needs to have absolute trust in, but those of
his jump partners. In one episode of his web series called Miles Above, Miles and his
teammates jump from a plane in wingsuits. They then criss-cross each other’s paths as the
Earth hurtles towards them. The stakes are sky high. One wrong move, one error of judgment,
would cause calamity.

DAISHER: ​We're basically trying to take the sports that we do to the next level. Like we'll
we'll change things up to where we take our pilot, Kirby Chambliss, he’s an Edge 540
world champion pilot. He loves to come skydive with us too. We'll take him and put him
on the back with Luke Aikins with his wingsuit and we come up next to them and we’re
high fiving Kirby. It may look like it's all fun and games one the videos where we come in
and we're just laughing and high fiving but it took a lot to get to that place, and not just
skills that we have developed, but an immense level of trust where you're trusting each
teammate to make the right decision and to not basically fly into you and kill you.

HOFFMAN: ​How do they develop that cast-iron level of trust? In the fast-paced world of
skydiving, there’s not always the luxury of time. So Miles has to rely on shortcuts.

DAISHER:​​ you've got to make judgment call at a moment's notice when you just meet
somebody and, "Okay, you're going to fly your airplane around me while I'm flying a
wingsuit, and I've got to trust you not to hit me with the spinny part of the front of your
 airplane so but you know they're world champions, you know their background is good.
But then if I don't trust their eyes, I'm going to say, "Yeah, give me some space.”
And that’s life, that’s for everybody, that’s not just skydiving and flying.

HOFFMAN: ​Well, as I always say, trust equals consistency plus time.

DAISHER: ​Lee Hoffman said, “Trust is the consistency of…” What was that again?

HOFFMAN: ​The name’s Reid, not Lee. And it was trust equals consistency plus time.

DAISHER: ​Consistency plus time? That is a good formula. Lee Hoffman, man, he's an
analyst. He can figure that stuff out. I thought I analyze stuff too much. My wife Nikki
says, “You always over analyze stuff!” Well ask Lee Hoffman about that formula, honey, I
think he's figured it out. Good job, man.

HOFFMAN:​​ Thanks Miles.

DAISHER: ​Cool, man.

HOFFMAN:​​ Whether you’re spinning through the sky at 10,000 feet, or trying to do something
more grounded, there will be times when you need to build trust. That’s because trust is a
fundamental component of any functional relationship. But it is also one of the most difficult to
build. I believe that to quickly build the foundations of a long-term relationship, you have to find
shortcuts to trust.

[THEME MUSIC]

HOFFMAN:​​ I​’m Reid Hoffman. Founder of LinkedIn, investor at Greylock, and your host. And I
believe that to quickly build the foundations of a long-term relationship, you have to find
shortcuts to trust. This is especially true if the relationship in question is wracked with suspicion.

Trust is normally based upon a simple foundation: consistency over time. But this is a problem
for anyone who hopes to blitzscale. A slow-moving blitz is an oxymoron. You often can’t wait for
trust to develop at its natural rate. So how do you remove time from the establishment of trust?
You have to find a shortcut.

It’s like the tentative first dance at the beginning of a relationship. You have to transition from an
awkward slow dance to a self-assured quickstep — without putting off your suitor. Neither of you
is sure of the other’s intent. Is your potential partner in it for the long term? Or will they take you
for everything you’ve got as soon as your guard is down?

When companies partner, they go through the same kind of courtship. But it’s hard to even get
on the dancefloor when your partner sees you as a mortal enemy. In these cases, you need to
be bold. Make a sweeping gesture to win that first dance. Dazzle them — not just with your own
innovative moves, but by making them look great.

To test this theory, I talked to Daniel Ek, founder and CEO of Spotify. When Daniel founded
Spotify in 2006, online music piracy was at its peak and the record industry was losing the fight.
Daniel had a vision for a free, legal streaming service that would put the world’s music at
listener’s fingertips. It would triumph over piracy. And it would set the music industry on a fairer
course that would give record companies and artists their fair share of online music revenues.
But to win, Daniel would have to lure users away from pirated music, which they already had for
free. He’d have to persuade record companies to set aside their inherent mistrust of all things
digital, and give his free service their blessing. In both cases, he had to find shortcuts to win
their trust.

For Daniel, trust is more than a five-letter word. It’s a concept rooted deep in the culture he grew
up in.

DANIEL EK:​​There's something called the allemansrätten and its literally translation is
"everyman's right" and this comes at the core of Swedish. For instance, if you own a
piece of property in Sweden, people are allowed to walk your property. If the property is
large enough, they're actually even allowed to tent at your property for 24 hours.

HOFFMAN:​​ “Everyman’s right” is a very Nordic notion of the social contract. One that sounds
kind of crazy to American ears. Try to imagine yourself walking onto someone’s property in the
US, pitching a tent, and proclaiming it’s your allemansrätten as you roast marshmallows over an
open fire. You know how that story ends.

But Swedes have a totally different conceptual framework. You have to grow up in it to fully
understand it. And this is lesson one about trust: It has different baselines across different
cultures. In Sweden, for example, everyone’s tax returns are publicly available.

EK: ​This notion of “private versus public” just doesn't exist to the same extent. Like all
income is public in Sweden, like every single one. I think that, plus the fact that it's such
a small society, means that the number one thing the whole society is built on is trust,
like you can't screw people over. You have to honor your agreements.

HOFFMAN: ​Daniel sees this deep, Swedish concept of trust as an advantage. And it’s fair to
say we have Sweden to thank for Daniel’s lifelong love affair with music. It started with his
family.

EK:​​ It's one of those weird families, like in normal families, you would get a college
degree and that would be the important thing, not really in our family. In fact, no one had
a college degree, but having a music education was super important.

HOFFMAN: ​But his country made sure that no child left music behind.

EK:​​ In Sweden, where I grew up, there's actually free music education, which I think
explains a lot about how music is so big in that country and why it's such a big export for
us as well. You get taken to this place when you're about four or five years old, and you
walk around and you get to sample every instrument you can imagine. I walked around
and I saw people playing piano, I saw people doing the flute, I saw people doing all sorts
of things. In one of the rooms was this person who was playing the drums. I saw that and
I was like, "Holy shit, this is amazing. I really want to play the drums."
HOFFMAN:​​ Five-year-old Daniel was blown away by the possibilities. But there was one
inescapable reality.

EK:​​ My parents, because I wasn't really that into music at that time and nor did I really
want to do it, they said you can pick any instrument you want. "I want to play the drums."
They said, "Well any instrument you want… but the drums, because we were living in an
apartment and we didn't want to get evicted."

HOFFMAN: ​Daniel turned to a cool, older cousin for advice.

EK:​​ He had told me that I should pick the guitar because if I pick the guitar, I could
actually have a shot with the girls. As a five-year-old, I didn't know what "have a shot
with the girls" actually meant, but I thought he was a pretty cool guy, so I ended up
playing guitar. That's the story of how I started picking up the guitar.

HOFFMAN:​​ When did you start picking up programming, and then was there any
connection between music and programming at that time?

EK:​​ No, it wasn't really any connection between the two. It was a C64.

COMPUTER VOICE: ​The C64 is also known as the Commodore 64. It was an 8-bit
home computer popular in the 1980s.

HOFFMAN:​​ With a cassette?

EK:​​ Yes, with a cassette, indeed.​ ​Then one day, the cassette broke. The actual player
broke down. I started deconstructing the player and figured out how to fix it. Next time
the computer broke down, I took it apart, and then put it back together again and fixed it.
Got a bit overconfident so at one point, I asked someone who was an engineer, “What's
the hardest thing to learn?" The person said, "Well, C++ is probably the hardest thing to
learn."

COMPUTER VOICE:​​ C++ is a computer programming language. It is indeed one of the

hardest things to learn.

EK: ​By age nine, probably I thought, "Hey, I'm going to learn how to program C++." And
about 40 pages of code later, I could construct the mouse cursor that moved around,
which felt like a lot of work for something relatively simple.

HOFFMAN:​​ Let's talk about your first entrepreneurial venture.

EK: ​Yeah, about 1997, people had started talking about web pages. And in Sweden at
least, it was kind of the craze that everyone should have a web page. So one day, there
was someone who asked me if I could create a web page for them. I didn't know how to
do HTML and I certainly didn't know how to do anything in design. My instinct was to say
no. The person kept coming back and asking me again if I can do it. About the third time
the person asked, I decided to just take an absurd number that I can think of just to
 make sure I get rid of the person. I said, "Well, sure I'll do it, but I want $5,000 to do it."
The person said, "Done." I'm like, "Oh, holy shit, I now actually have to learn how to do
this."

HOFFMAN:​​ Daniel built those web pages, and he built them well. Word spread. More people
sought him out. He raised his price to $10,000. And they agreed to pay. What happened next is
one of the most audacious examples of scale I know of, especially for a teenager.

EK: ​Fast forward, I'm now like in later stages in elementary school. I had all the people
in my class that were good at math and I taught them how to do HTML for me and the
people that were really good at design, I taught them Photoshop. I was basically running
an illegal sweatshop, when I was 14. That was the start of my entrepreneurial career.

HOFFMAN:​​ It wasn't so much as a sweatshop, because unlike classic child labor things,
which is like, "Oh, they're working 12 hours a day..." and so forth. This is very high price
goods with skills that help them have entire careers later and so forth. The
entrepreneurial side of this is cool. One would normally think that when you experience
this much success early, you would just keep doing it. What caused you to go like, "This
is great. I've got a huge income coming in. I did that, time to move on"? What was the
thinking?

EK:​​ What I started off doing was I bought the TV I wanted, I bought the guitars that I
wanted, and I even got the computer that I wanted. Eventually, I ran out of things to buy.

HOFFMAN: ​Notice that among all the material possessions he lists, Daniel the music fan
doesn’t mention buying records or CDs. It’s not because his love of music had died. Quite the
opposite. Daniel was listening to more music than ever. But like most people across Sweden, he
was buying less of it.

The age of music piracy had begun. And Sweden was leading the way. Thanks to
government-mandated broadband, the country was way ahead of the rest of the world in terms
of internet speeds. Music files that took hours to download in other countries could be
downloaded in Sweden in seconds. People became used to fast, free access to stolen music.
And Daniel was no exception.

But piracy did more than super-size his music library. It gave him a calling.

EK: ​The pivotal moment when I realized that I wanted to work with the internet
specifically, not just as a software developer, was the first time I tried Napster.

SIRI:​​ Napster was a file sharing service launched in 1999. It was infamous for allowing
people to illegally share huge amounts of copyrighted music.

EK: ​For me, it was like really an epiphany because up until that point, the internet was
mostly about text and maybe some blinking GIFs. All of a sudden came this Napster
thing, which enabled you to get access to the entire world's music. For someone who's
really into music, it was phenomenal. I've discovered so much great music from it. When
 it got shut down, I figured that you can't put the genie back in the bottle, so something
like it must exist.

HOFFMAN: ​Daniel was right. The genie was out, and there was no going back, despite the best
efforts of record companies. Napster may have been sunk by a legal broadside in 2001. But
others sprung up to take its place. The genie had granted every music fan their wildest dream:
No less than every piece of music ever recorded. For free.

The record companies went to desperate extremes to stop it. They sued piracy services, and
even private individuals. Meanwhile, artists from Britney Spears to Metallica railed against the
illegal downloaders, saying it was as bad as shoplifting CDs. Musicians had lost trust in their
fans. And fans lost trust in musicians. Trust was at an all-time low across the board.

And this was Daniel’s opportunity.

EK:​​ I thought long and hard about what I was passionate about and what made me get
into technology to begin with. Funnily enough, I took a stint off for a few months and just
played guitar, like on the road with various Swedish artists. I was doing more soul
searching than anything else.

What came back to me was I had these two passions in life: music and technology. It
started dawning upon myself: why haven't anyone fixed this? Why haven't anyone made
the Napster thing work, both for consumers and work for artists as well?

HOFFMAN: ​From his outsider perspective, Daniel saw that music consumption had become a
zero sum game. A war between music fans and music companies where one side had to win
and the other side had to lose. Daniel believed this could be fixed — but he’d have to both sides
to trust each other — or at least, to trust him. I asked Daniel about his strategy, when he set out
to build Spotify, and bring both musicians and fans to the table.

HOFFMAN: ​What was your theory about that inclusion? Was that like, "Oh god, this is
going to be really hard?" Or actually, in fact, "No, no, we should be able to do this
because this helps all of them get to the internet age as well."

EK:​​ Yeah. I was just really naive to be honest then. Like many other entrepreneurs, I
didn't understand nearly enough what it would take to get this to work. It really started
with just being your own customer in the sense that I had this idea of the kind of product
that I wanted to see in the world. The way I articulated that to my team was: what if we
can build something that makes it feel like we had all the world's music on your hard
drive? If we can create that feeling, we would have built something that's much better
than piracy, so we're going to get people to consume it. The second part of that
equation, in order to not get shut down is obviously, it has to work for artists.

HOFFMAN: ​Daniel was clear about what his product needed to deliver. But he had misjudged
the depths of mistrust and acrimony that were coursing through the music industry. And he was
about to dive head first into this treacherous riptide. To avoid being pulled under, he realized he
needed to win the trust of the consumers and the record companies.
And it would be an Olympic effort. Remember what Daniel just said:

EK: ​If we can create that feeling, we would have built something that's much better than
piracy.

HOFFMAN: ​Daniel wasn’t just going to build something great. He had to build something better
than piracy. Music lovers already had the world’s music at their fingertips. Daniel would have to
build something so compelling that it was better than free. How do you create something better
than free? One word: Speed.

EK:​​ The speed thing was something that I obsessively focused on.

HOFFMAN:​​ Although illegal downloads were free, they could be slow. So Daniel would offer
something faster than piracy. But he wasn’t satisfied by just being fast. What he knew — and
focused on relentlessly — is that music lovers would be won or lost in the first few seconds of
trying his product. No, scratch that. In the first milliseconds. Two hundred milliseconds, to be
exact. Daniel wanted the gap between a user hitting play, and the music hitting the user's
eardrums, to be imperceptible.

EK:​​ I read in this book that the human brain takes about 200 milliseconds to perceive
anything, like at all. I said to the engineering team, we gotta get this down to 200
milliseconds. At that time, that was 2006, that was considered crazy.

HOFFMAN: ​Daniel never gave up his so-called crazy emphasis on speed. He pushed his
product team relentlessly. Until they made Spotify so fast, it seemed like magic. And like any
good magic trick, it relied on some timely misdirection.

EK: ​We never got it down to 200 milliseconds consistently. We got it down to about half
a second but when you play then with things such as the throbber...

HOFFMAN: ​...The throbber is the animated symbol that indicates a piece of software is working
on something...

EK:​​ …and you actually, cognitively make it move even before there's sound, the human
brain perceives it to be instant even though technically, it wasn't. There's a lot of things
that you could do, and I got really into the details there of just creating an amazing
experience that solved the end goal. I think I was very clear from the beginning that this
needed to feel like you had all the world's music on your hard drive. Meeting
entrepreneurs today, I would say, it's very rare that I hear someone who can articulate
what the end status of that product that they're trying to build, we realized if you do solve
that, that's going to be a huge thing.

HOFFMAN: ​One music lover who immediately fell under Spotify’s spell was Gustav Söderström.
He’s now Spotify’s chief R&D Officer. But when he first saw Spotify in 2009, he hadn’t yet joined
the company. He became an instant fan.
 GUSTAV SÖDERSTRÖM:​​ So for me, it was really this illusion of how did they download
the entire internet to my computer? This is amazing. It must be a trick. I thought it was a
trick. I was trying to look behind the computer, like they have this huge hard drive
somewhere, right?

HOFFMAN: ​Gustav joined Spotify to lead the roll-out of its mobile version. He’s now overseeing
all design, technology, data, and engineering. He believes the illusion of a fast download was
what set Spotify apart from the free music that was already available.

SÖDERSTRÖM:​​ The offering that consumers had, it wasn't legal, and it was horrible for
creators. But from a consumer perspective, it was fantastic. And to this day, the piracy
catalogue was and is bigger than any streaming music service has. So the right question
is :why on earth did Spotify work at all when people already had this?

Spotify had a very distinct magic trick, the magic trick was the illusion of actually having
all of Pirate Bay downloaded to your hard drive.

SIRI:​​ Pirate Bay is a website that allows people find and share media. Founded in
Sweden in 2003 by an anti-copyright organization.

SÖDERSTRÖM:​​ So whatever song you clicked, it started playing immediately. That was
the magic trick.

HOFFMAN: ​The science-fiction author, Arthur C Clarke put it best when he said, “Any
sufficiently advanced technology is indistinguishable from magic.” And every truly great
consumer product has had one magical feature that gave it the “wow” factor. With the Tesla, it
was the unbelievable acceleration, which they call “ludicrous” mode. With the iPhone, it was the
multi-touch screen. And with Spotify, for its initial users in Sweden who gave it its start, it was
the speed that made them believe. Speed was Daniel’s shortcut to his user’s trust.

But to cement a long-term relationship with users, speed was not enough. Spotify would have to
prove its worth, day after day. And for hard-core music fans and casual listeners alike, this
meant helping them discover and share music. Playlists would be key.

SÖDERSTRÖM:​​ If you think about the original Spotify, it really was a fantastic product
for music lovers, but all it really was, it was a search box and this playlisting tool. You
could literally soundtrack your entire life with these playlists, but you had to be a music
aficionado. A few years later, there was this company called Tunigo that wrote an app
that you could use inside Spotify.

What they had is a set of editors who actually created playlists for different occasions.
They had playlists for dinner with friends, for barbecuing, for running. Back then, most
users playlisted along genres, but they playlisted along use cases, and for the masses.

Now we on the inside, we actually saw the data, and we saw, "Wow. These playlists are
doing great. These people are really good at playlisting." We ended up acquiring this
company​,​ putting them on the inside, and giving them access to the actual data where
they could see the number of skips per song and how the music playlists perform. They
 became very quickly, the world's, by far, most data-driven editorial team who could really
optimize for engagement.

What then happened was, the whole machine learning wave started to happen.​ ​If you
asked someone who loved music, they said, "A machine could never curate for me." It
wouldn't happen, but actually the opposite happened

HOFFMAN: ​By analyzing massive amounts of data, and by keeping human curation at its core,
Spotify created an approach to playlists that users grew to trust. Casual listeners tuned in for
playlists of workout music or tunes for a summer barbecue. Hardcore music lovers were
shocked by how well Spotify predicted their taste. They came to trust Spotify. If Spotify was
going to succeed over the long term,​ ​users would have to trust them with more and more of their
time over the short-term, before they made a long-term commitment. Instead of pushing them to
pay, Spotify used a great free product as a shortcut to trust.

SÖDERSTRÖM:​​ We give you a free product and the better that free product is, the more
you use it, the more you're going to convert. It's the most engaged people. They want
additional features. They want offline mode. They don't want the ads. They want
speakers. All these things right? When you think about it, it's kind of obvious, but it says
something. It says that your free products should be as good as possible to capture as
many people as possible, and make them as engaged as possible.

We got someone in who was using music maybe once a week. They clearly didn't think it
was worth $9.99.​ ​Then we gave them this great free product, and they started using
music more and more and more.​ ​At some point they hit, “I use this thing everyday, it's
easily worth $9.99.”​ ​Instead of assuming a finite world of people who are already
convinced, we have this machine that creates music lovers, whereas most of the rest of
the industry have the opposite. They're saying, "What if we frustrate the free users as
much as possible? Surely we're going to push them over." What happens is they push
them out.

HOFFMAN: ​Daniel found shortcuts to trust with his users. And he kept building and building on
those long-term relationships. But there was still an important hurdle he needed to cross. One
that would be fatal to his plans if he failed to clear it. He needed the music industry on board.
And for this, they’d need to trust him too.

Daniel decided to shortcut the time it would take to get the industry to trust him by offering
something the pirates hadn’t: money. If he offered the record companies some revenue, he was
sure they would jump on board.

EK:​​ My thinking was, well, up until that point, Napster and everyone else just haven't
shared any of the revenues, so I'm sure we can figure out a fairly straightforward
revenue share deal with the music industry, and they'll be happy because they get more
than what they're getting now. Obviously, it turned out that it wasn't that easy.

HOFFMAN: ​A straightforward deal doesn’t cut it, when you’re negotiating with someone who
believes you’re a mortal enemy. And that’s what’s so interesting and unusual about Daniel’s
story. Daniel is a disruptor. But most disruptors don’t actually work with the industries they’re
disrupting. Most of these disruptors just reinvent, push things aside, create their own closed
loop. Uber doesn't work with taxi companies. Airbnb doesn’t work with hotels. They just kind of
go, “We're doing our own thing. And you have to adapt around us.”

But Daniel’s plan depended upon the industry’s involvement. He had to get the rights to their
back catalogue. He needed the record industry’s trust. And he needed it quickly. In the
relationship prom, Daniel had to make a first-dance gesture that would sweep the record
companies off their feet. Offering a revenue share was not enough. I asked him how he
ultimately got them on board.

HOFFMAN:​​ Go into that a little bit because, without getting the licensing, the buying
from labels, or buying from the artists, scale not possible.

EK:​​ Yeah. It was really, really tough. I essentially told them, "Hey, you should really give
away all your music for free over here and make it legal because eventually, people will
start paying for the product." Not very surprisingly that wasn't a very convincing story to
tell.

HOFFMAN: ​Record companies had been fighting this new technology tooth and claw. It was a
tactic they had used previously in the 80s, when they claimed home taping was killing music.

ANNOUNCER:​​ Is your teenager spending all day in their bedroom as they try to record
the grooviest new sounds off the radio? Do you realise that this kind of aberrant behavior
is CRIMINAL and is a direct cause of low school grades, drug use, devil worship and
even MURDER. That’s right, MURDER. Because by home taping, your teen is
K-K-K-KILLING MUSIC.

HOFFMAN: ​Record companies were being assailed from all sides by services like Kazaa,
BitTorrent, and Pirate Bay. They saw all streaming as a deathly threat. And Spotify, with its free
subscriptions, was no different. Daniel had a lot of convincing to do. First, that he wasn’t trying
to kill the music business. And second, that he could save it. Clearly, it was not going to be easy
to win the trust of the record industry. So Daniel came up with a short cut.

EK:​​ If you looked at Sweden, at that time, I think, it had lost more than 80% of its entire
revenue base. It was really in shambles. Going from the beginning where I try to get
everything in all markets and realizing that that wasn't going to work, I decided to shift
strategy and instead take a very narrow market, where they lost most of it and said,
"Look, why don't I prove this to you and take it to my own home country?" I essentially
told them like, “I guarantee you one years' worth of revenue in that market if you enable
this business model."

HOFFMAN: ​Daniel was de-risking the deal for the record industry. He’d take a painful short term
loss in exchange for the possibility of a long term win.​ ​This is exactly the kind of short cut that
wins trust. The kind that puts your partner’s self-interest decidedly and dramatically ahead of
your own. This reminds me of a very similar conversation I had recently with Marissa Mayer.
Marissa was most recently the CEO of Yahoo, and has now started a new venture, Lumi Labs.
But she’s best known for her role at Google, where she intensively analyzed user behavior to
improve products. She told me a story that happened her first week at Google, when she joined
as employee #20. Google was a teeny up-start then. And they had just partnered with
Netscape, the industry giant.

MARISSA MAYER:​​ I walked in and Heather, the office manager, said, "We're down.
Google's offline." It turned out that Netscape, we thought they were going to send us one
fifth of their queries, but for a period of time they sent us all of their queries, and it was
more capacity than we could handle. It knocked us offline.

HOFFMAN: ​They had to decide: Keep their own website up and disappoint their partner? Or
service their partner and take their own site down?

MAYER: ​They actually took our site down and put up a line saying, "In service to our
partners, Google.com will be off service," basically until further notice. It was a really,
really chaotic day. I remember it was not very confidence-inspiring, because we had this
little kitchenette for snacks and there was a little cranny, and I walked in there, I think I
found Larry in the cranny.

HOFFMAN: ​That’s Larry Page, Google’s Co-Founder.

MAYER: ​I was kind of surprised, I turned around and saw him there. I was like, "Hi," and
he was like, "I just needed a minute to think about what to do."

HOFFMAN​​: “This is my private moment.”

MAYER​​: I was like, “Okay."

HOFFMAN: ​By putting Netscape’s interest squarely ahead of his own, Larry was making a
strategic short-cut to gain their trust, and build the foundation for a long-term relationship. But it
wasn’t an easy decision. It’s exactly the kind of decision that would send you straight to the
cranny in the kitchen. But Larry made the right call. And, well, it has worked out pretty well for
Google.

And it’s worked for Spotify as well. Daniel earned the trust of the music industry. He had the
trust of listeners. And that got him the attention of investors, who now trusted him enough to put
real money into Spotify.

Daniel was on a roll. Surely, now that he had proven himself, it would be a simple matter to
extend Spotify’s reach out of the Nordic countries and into the rest of Europe, and then the US.
After all, the music rights were owned by the same record labels. Even, in a lot of cases, the
very same record executives that Daniel had already proven himself to.

EK:​​ I kept being really surprised by how lukewarm everyone ended up being on the
other side. I was starting to second guess my own enthusiasm about the space. And I
remember, specifically, I was on one of these major label's retreats​ ​and my pitch was
“We're entering the golden age of music.” And there wasn’t a single person applauding
anything I said. They just looked completely shocked. I walked off stage and there was
like this one guy that came up and said, "Oh, it was a really interesting speech. This is
 the first time anyone said anything positive today." There had been in such a long
sequential decline that anyone seeing anything different was just unbelievable.

HOFFMAN: ​Outsiders tend to stay on the outside a long time. It wasn’t until 2015, almost a
decade since Spotify had been established and seven years since the Nordic experiment, that
Daniel says he started to feel like he was a part of the conversation.

EK: ​This is a community where people have known each other for 20 plus years. If you'd
only been there for like 10 or 15, you're kind of a newcomer, like maybe you'll be around,
maybe you won't. I'm still a bit considered the outsider, but what I realized was when I
started getting included in the conversations that they were having, that's when the
general acceptance started happening. And that's where we could build mutual trust and
start working together on what I think will be kind of the next level of growth for the
company, where music in and of itself will change.

HOFFMAN: ​They may have hacked trust to get the initial buy in. But Spotify is still working
toward the long-term relationship they want with the record companies.

EK: ​At the end of the day, it’s about trust and if you say that what you're going to do and
then keep on doing that, you will do pretty well. If you think about what we're now trying
to do as a public company, it's exactly that. I didn't realize it but it's been quite a cultural
shock for even Wall Street to start realizing, and I'm hoping that they'll get to it and
eventually start trusting us.

HOFFMAN:​​ Well, consistency over time is part of trust.

EK:​​ Indeed.

HOFFMAN: ​I’m Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Diane Greene

REID HOFFMAN​: We talk a lot about being a master of scale on this podcast. But for a few
minutes, let’s talk about being a master of—crabbing?

DIANE GREENE​: You know, there’s a lot of technique. I was like a master crabber. I
could make sure that my net never cast a shadow, so the crab didn't see me coming up
behind him, and I'd scoop him up.

Diane Greene has been hauling crabs out of the Chesapeake Bay since she was a kid. Not long
ago, she and her kids returned to her old fishing hole.

GREENE​: And I was like, “Let's go on this dock and we'll find some crabs, and I'll teach
you how to catch them."

And I went through this long, elaborate lesson with my two kids about how to catch a
crab, and how to have it not see the shadow and everything—and then I said, "Now, you
just never can do it your first time, because they're so fast and everything." And I think
maybe the pollution has slowed them down, because both my kids caught a crab the first
time, and I'm like, "So much for that."

HOFFMAN​: OK, so even inexperienced kids can now catch a few crabs, but we’re talking about
being a ​master​ crabber. A master crabber can’t rely on a lucky catch. They need the skills to
find crabs on unlucky days. In short, they have to ​think​ like a crab.

Where do crabs tend to congregate? Diane has a tip.

GREENE​: They were pretty abundant, particularly on this railroad trestle bridge we had
near our house. We could go along on a dinghy, and catch these things and sell them.

HOFFMAN​: How do crabs hustle? She’s got that covered, too.

GREENE​: Sometimes when we were on our boat, we would play this game where
someone would be up on the very front pulpit, and then people would be on either side,
and they'd call "right," "left"—starboard, port—"There's a crab!" And see if you could
catch it while the boat was moving at about five knots.

HOFFMAN​: And once she could steer her boat above a skittish crab, a moving target less than
a foot across, she was unstoppable.

GREENE​: We could catch hundreds of them if we wanted, and sell them by the bushel
and make good money.
HOFFMAN​: One thing you should know about Diane: she’s not just a master crabber. She’s
also a master of scale. She co-founded a company, VMware. If you’re outside of Silicon Valley,
you may not recognize the name VMware, but their work impacts you every day. They’re one of
those behind-the-scenes companies that brought us into the age of Cloud computing. If not for
VMware, you could argue there would be no Cloud, which means no Gmail, no Dropbox, no
way to connect to your information from any device.

VMware is such a big deal, I was surprised to hear our tech-savvy producers didn’t know about
Diane. In my world, she’s a household name. VMware hauls in seven billion dollars of revenue
each year. That’s more than 10 times the revenue of the entire seafood industry of Diane’s
home state of Maryland.

There’s a common thread here between Diane’s crabbing days and her scaling days. A scalable
idea rarely sits squarely on the path ahead. It’s always scurrying off to the left or the right, and if
you can’t get your team to adjust course quickly, it will slip out of sight. I believe scalable ideas
often come at you sideways.

[Theme Music]

HOFFMAN​: This is Masters of Scale. I’m Reid Hoffman, co-founder of LinkedIn, partner at
Greylock, and your host, and I believe the most scalable ideas often come at you sideways.

There’s something liberating about this theory. You don’t have to have a completely scalable
idea from day one. In fact, you can have no idea what your product might look like, or how you’ll
get to market, or how you’ll make money. You might survive, so long as you know how to look
sideways. And there’s an art to the sidelong glance that we’ll get to in a moment.

But first, I should clarify that sometimes a scalable idea does come at you head on, exactly as
you imagined. Jeff Bezos saw the master plan for Amazon clearly laid ahead of him,
step-by-step.

But visionaries like Bezos are a rare breed. Most entrepreneurs crabwalk toward a bigger
market, and then a bigger one still. And as they move along, the full market will come into view,
and they’ll wonder why they couldn’t have gotten there sooner. On today’s show, we’re going to
explore how an entrepreneur can crabwalk as quickly and intelligently as possible.

I wanted Diane Greene to share her story, because if anything defines her career, it’s a series of
pleasant surprises. She doesn’t have a master plan so much as a big idea, and an extraordinary
ability to sidle up to it. She has a knack for starting on a small project, and leaving behind a
lasting legacy. This goes all the way back to her college days.

GREENE​: Well, I never had this moment, "Oh, I'm going to go try and create
businesses." But I'd always built stuff.
 I started the University of Vermont ice hockey team, which is a big varsity, very
well-performing women's ice hockey team today, no thanks to me. But I did start it, with
some friends. My whole life, I was starting things, and building things,

HOFFMAN​: She spots a need, and starts solving for it—whether it’s a women’s hockey team, or
a new use for some emergent technology.

Diane tends to see tectonic shifts in technology before anyone else around her. She doesn’t
know what role she’ll play in the future, but she’s so far ahead of the curve that she ends up
shaping that future herself.

And I think her ability to solve huge problems stems from a particular frame of mind. She doesn’t
pursue money, or fame, a product, or a leadership position. She pursues a big, abstract idea.
She has this almost academic detachment from the business world—but that’s precisely what
makes her so formidable.

Diane studied computer science at Berkeley. Her husband, Mendel, teaches computer science
at Stanford. They tend to follow research the way some couples take up tennis or salsa lessons.
They learn together. And one day, she and Mendel woke up to a huge idea.

GREENE​: He was giving this sunrise breakfast at—I think it was Mayfield—and I was
like, "I'm going to that, that sounds pretty interesting"—because we usually miss each
other on those things.

HOFFMAN​: This was a breakfast Diane wouldn’t want to miss. She was about to get a glimpse
of the future—a huge, industry-shaking idea. That idea? Server virtualization. If you’re not
hopping out of your chair with excitement, allow me to explain.

When you retrieve emails, or open documents, or launch an app, your computer most likely
fetches data from a server. 20 years ago, those servers were physical machines—big metal
boxes that you had to own as a company. And they were finicky machines. They only talked to
certain computers. If your computer ran Windows, you needed a Windows-friendly server. If it
ran Unix, you needed a Unix-friendly server. Those servers would sit there idly, waiting for the
right device to speak their language. They required constant maintenance, and consumed tons
of energy. They were like dilettantes, fanning themselves and insisting that the IT team skin
their grapes and clean their dishes.

But imagine if you could replace all of those layabout servers with one busy machine—a server
that could speak to any device.

That’s essentially what Mendel was proposing—one server to rule them all. It didn’t even require
hardware. In fact, he could add a bit of code to existing servers and get them all talking. As
Mendel described how this code might work, it dawned on Diane—perhaps they could liberate
the data and allow it to move freely across servers. All it would take is creating a virtual
machine.

GREENE​: He goes, "You've got Microsoft, with the Windows, basically monopoly, and
you have Intel, with the basically X86 monopoly."

And I could just see him in real time—he goes, "What if you could drive a wedge in
there?"

HOFFMAN​: This was the crux of Mendel’s research. He was investigating whether he could get
these two operating systems to talk to each other, whether he could build a bridge between
these two walled gardens.

It was anybody’s guess how big that wedge could be.

GREENE​: And so we drove back, and I'm like, "Yeah, the virtualization—we should
really do this, this is really interesting." I kept saying, "You know, I really think this should
be brought to market, and I could help you." And so finally, Mendel and I kept talking,
and we just realized how horizontal and useful the technology was, the more we talked
about it.

HOFFMAN​: These quiet conversations among colleagues are critical for any idea that comes to
you sideways. You ask "Are you seeing what I'm seeing?” With each conversation, your own
vision gets sharper. The true idea comes into view.

GREENE​: And so we asked the grad students, "Hey, we think we could do a company
with this, would you be interested?" We didn't feel that strongly, but we were like, "We
think there's a real company here, and this really could be pretty important."

HOFFMAN​: It soon became clear that this sideways glance would draw their full attention. But
notice how Diane didn’t feel that strongly about building a business. She was passionate about
an idea. She had a vision of the future—a new, virtual machine that could communicate across
all devices.

GREENE​: We really had a pretty accurate vision of the importance of it, and where it
could go. Now did we for a second think we could build a multi billion-dollar company?
No. That wasn't relevant.

HOFFMAN​: Even if it was irrelevant, she had it on her radar. She may not have prioritized
building a business. But she didn’t want someone else to do it first. And she noticed, out of the
corner of her eye, a growing excitement beyond Mendel’s breakfast clubs. His research was
gaining attention—unwanted attention.
 GREENE​: I got this email from him that he had a paper under blind review—”Bill G., and
Nathan M., and Rick R. would like to read it, would that be OK?”

HOFFMAN​: Did you catch those names?

GREENE​: Bill G.

HOFFMAN​: That would be Bill Gates, the founding CEO of Microsoft.

GREENE​: Nathan M.

HOFFMAN​: That would be Nathan Myhrvold, the founder of Microsoft’s research department.

GREENE​: Rick R.

HOFFMAN​: Alright, I don’t know who that is—but look, once you have Bill Gates circling on your
idea, that’s an awfully strong indicator that you’re onto something. And this raises a crucial point
in your sideways journey to scale. You don’t just have to look sideways—you have to listen.
Fortunately, your ears are on the side of your head—use them. Your competitors might just be
rustling in the bushes. And if you spy a big idea off to one side, you should rejoice—for about a
millisecond. And then you should sprint.

GREENE​: And we're like, "Huh—we really ought to get a patent filed."

HOFFMAN​: Diane and Mendel secured a patent, and just in time. As an entrepreneur, you need
to know how to read the competition appropriately, whether it’s competition from large
companies, or startups. If you’re sailing in a space by yourself, and everyone else thinks you’re
kind of crazy, that’s great. Then you actually have time. But if you think your competitors are
coming, then frequently it isn’t just one, but five or more competitors.

Does that mean your shot at success shrinks to one out of five? Nope. The odds are even
worse, because it’s possible that not a single one of you will succeed. You end up in a circular
firing squad. Not one of the companies reaches critical mass in customers or talent. You’re all
scrambling for capital. Investors look at you, and all go, “I don’t know which one of you to pick,
so I won’t pick any of you.

So as an entrepreneur, you need to see and hear ​potential​ competitors as they come at you
sideways, and you need to break away from them quickly. It can be the difference between life
and death.
HOFFMAN​: And here’s where I have to tell you something else about Diane. Her ability to read
the competitive field is second to none. And I suspect it has to do with the formative years that
she spent as a competitive sailor. I suggested this to her when we spoke.

HOFFMAN​: As I understand it, you grew up sailing, won championships—

GREENE​: Yeah. I'm the women's national champion, actually. Second in the 470
Nationals, which was an Olympic-class. My father had a sailboat, and so we'd go out,
and I was steering that boat from the age of two. And the thing about racing is, it's
everything. Because you have to be prepared, your boat has to be prepared, the
equipment has to be highly tuned. You want to have the fastest stuff, so you're always
looking for an advantage with your equipment.

And then, you have to be practiced, and if you have a crew, your teamwork has to be
incredible. I sailed little dinghies, up to boats with 12 people on it. And then when you go
to race in a regatta, you want to have a plan for how you're going to win the regatta.

You know, you get out there, and there's so many variables to evaluate. There's the
weather, there's the wind, there's the current, there's the competition, and what you
predict is going to happen.

And then as soon as you start racing, things start changing. "Well, should I tack? Should
I cover that person? Should I really go into the shore like I thought? It looks like the
wind's changed." And you can’t wait around, you’ve got to make a decision
instantaneously.

And so you're constantly reevaluating, you're constantly getting feedback on whether or

not you made a good decision.I think it helped me really hone that ability to constantly be
looking at information, evaluating it, and making decisions on it

HOFFMAN​: So actually, in fact, there's a direct tie between the crab fishing, and the
sailing, and the detail, and actually, in fact, how you bring all these together—

GREENE​: Yeah, it's very natural for me, because I've been doing it since I was little tyke.
I understand the weather, I understand the wind patterns, I understand the currents, I
understand the ecosystem of competitors pretty well,

HOFFMAN​: Diane’s ability to read the playing field guided VMware from those earliest days.
And after they secured their patent, they got some breathing room. Aside from the stirrings up in
Redmond, Washington, the competition was quiet. In fact, there were times when it seemed Bill
Gates was the only outsider who saw the potential of her idea.
She sometimes tried to explain the idea at parties. She told me about one gathering at a friend’s
house, with a room full of supposedly like-minded entrepreneurs.

GREENE​: He had all these dot-com people—like Pets.com, and Webvan.com, and
Toys.com. And all those people were there, and somebody's like, "Well, what do you
do?" And I'm like, "Well, I got this virtualization software company."

And they're like, "Oh my god," you know. "Can you get with the program, don't you know
software's dead?"

HOFFMAN​: What they were really saying was that desktop software is dead. Listeners of a
certain age may remember software arriving in cellophane wrapped boxes. You’d take a CD
out, and download the program right onto your computer. God forbid that you might spill coffee
on it. But with the emergence of dot-com services, desktop software was considered passe.
Everyone figured software would eventually move online, to what we now call the Cloud. They’d
hear the word “software” and think, “yawn.”

Little did they know that Diane’s software would make the Cloud possible. The future they
imagined would happen because of her and Mendel. But they couldn’t see it.

Here’s the thing—when you’re moving sideways toward a big idea, you may find yourself
jarringly out of step with the trends of the time. Picture a highway. All of the cars are speeding
ahead at 80 miles an hour. All of a sudden, you decide to veer sideways across six lanes. The
other cars see you and they think: “That’s an accident waiting to happen.”

Diane drew her fair share of these reactions. But she found one investor who shared her vision.

GREENE​: We told them what we were doing, they're like, "That's really important, that's
really cool. How much of a check can I give you?" I think it was a $300,000-dollar check.
And I'm like, "OK," and he gives me this address. And I didn't have Google Maps back
then, and I'm looking at the map, figuring out where his house is.

HOFFMAN​: Remember, this is the late ‘90s. There’s no Google Maps. There are no
smartphones. Diane is sitting in her car looking at a paper map.

GREENE​: Then I see this driveway just strewn with newspapers and leaves and
everything, and he's like, "It's under the newspaper." [Laughs]

I'm like, "Which newspaper?" Anyhow, I hunted around, found my check.

HOFFMAN​: [Fades]
HOFFMAN​: Yes, that was a $300,000-dollar check—under a newspaper in a driveway in Palo
Alto. We won’t give the address.

With her $300,000-dollar check in hand, Diane was ready to go to market. How? Here’s what I
find so fascinating about Diane’s launch plan. There wasn’t much of a plan. Which raises the
question, did she have any idea how big of a market she was chasing? I posed the question to
Diane directly.

HOFFMAN​: Some of the things that you repetitively do is you create markets that didn't
exist before. And I think one of the interesting theories about scale is that sometimes, the
market never looks as big at the beginning as it ultimately ends up getting.

A modern example is Uber. It's like, "Oh, it's just a limo, black car—oh wait, it's
transportation as a service." Is that a right thing to think about the early-stage VMware?
The technology is super important, and obviously, it drives a wedge in this duopoly. But
what was your thinking about the initial VMware—the size of the market, the size of the
business—what kind of opportunity were you pursuing?

GREENE​: So interestingly enough, for VMware, we did see VMware totally.

We called it almost a Swiss Army knife—there were so many benefits to running in a

virtualized world, that we were positive, if we could get the market to adopt it, that it
would be adopted everywhere.

HOFFMAN​: I love this metaphor of the Swiss Army knife. It sums up the curse and the blessing
of inventing an all-purpose tool. On one hand, it’s wonderfully versatile. On the other hand, how
do you sell all of those features? We figured we’d go straight to the experts, the makers of the
Swiss Army knife, to find out how they refined their pitch over the course of a century. Turns out,
their pitch is still evolving.

CHRIS COSTA​: XAVT has 80 implements. And there’s some electronics in there.
There’s a thermometer, there’s a timer...

HOFFMAN​: That’s Chris Costa, Director of Product Management and Packaging at Victorinox,
and a sort of Swiss Army knife historian. He was trying to recall just a few of the 80 tools that
are packed into their biggest model, the XAVT.

COSTA​: There’s some digital aspects to the scale. It has a little flashlight. It’s got all the
standard things—large blades and corkscrews and things like that. So it’s a big, beefy
knife.
HOFFMAN​: Now it’s exceedingly rare for a first-time buyer to walk into a Swiss Army knife shop
and just say, ‘Give me your biggest, beefiest knife.” Most people start with a smaller model.
Maybe it’s just a single folding blade—and that’s where it begins.

COSTA​: Once it’s a first-time customer, and they’ve gotten one of our knives—it was a
gift, or something they picked up themselves—invariably, they’re back for more. “Do you
have a knife for this? I cook a lot,” or, “I’m a baker,” or, “I’m out on my boat.” So they’ll
come back and get more. I always say to people, “You never know which one you’re
going to need till you need it. But when you need it, and it’s with you, then you have a
solution.”

HOFFMAN​: Let’s come back to Diane and her metaphorical Swiss Army knife. She was building
tool after useful tool for VMware, and she was certain that someday they would all be used.
From the beginning, she had a big vision for what VMware could eventually become.

GREENE​: We were positive, if we could get the market to adopt it, that it would be
adopted everywhere. We never were thinking of it in terms of dollars, we were always
thinking of it in terms of, how many computers can we run on?

HOFFMAN​: Now mind you, there’s a lot of revisionist history in the business world. I know
entrepreneurs who realize the scope of their vision only ​after​ their company scaled. They recall
feeling sure-footed. They insist that the long-term vision was always in the back of their minds.
But the truth was a lot foggier.

Diane is one of those rare entrepreneurs who really believed in her vision from the start. Even
when she had no idea how to get there, she insisted to her staff that this idea was huge.

GREENE​: The first office manager I hired, who really was my Chief Operating Officer,
V.J. Richey, she came in when we were 10 people, and she still reminds me how I said
to her, "V.J., this technology is going to run on every computer system in the world
someday."

HOFFMAN​: There’s a power to balancing this sort of exuberance against short-term realism. It’s
not easy to inspire your team, absent a clear path. Believing in this vision, and selling it, is an
essential part of the entrepreneurial crabwalk. Because if you really sell it, your team will stick
around even as you push them all to drop what they’re doing, and move sideways.

And you have a lot of side-stepping ahead of you, as you embark on the most critical journey for
a young company.—the search to find your first users, and establish your first market.

HOFFMAN​: How do you start building your go-to-market?

GREENE​: [Laughs] You start throwing spaghetti at the wall. We were trying everything.
HOFFMAN​: On her first attempt, Diane reached out to IT teams and promised huge savings on
servers. The response from customers? Total disinterest. It was the ‘90s. The first dot-com
boom. Who needs savings?

GREENE​: They didn't feel the need to have efficiency. So we were really having a rough
time explaining the benefits of this to them.

HOFFMAN​: So Diane started selling her idea to fans in the oddest places.

GREENE​: We noticed the bulk of our first customers were college professors. They were
physicists and chemists, and so that was our joke—"VMware, it's not for everybody.
You've got to be a college science professor."

HOFFMAN​: College science professors—not exactly a scalable market. But sometimes,

discovering your customer base can be as random and unexpected as discovering the product
itself. Luckily for Diane—and unluckily for everyone else—the dot-com bubble burst. Suddenly,
struggling companies showed up at her door, in search of savings.

GREENE​: A lot of companies started discovering they didn't need to buy new servers if
they bought VMware. So then it was really almost uncanny, but several of our biggest
customers had declared bankruptcy. And then when this happened, well, "VMware, it's
not for everybody, you've got to go bankrupt to appreciate it." [Laughs]

HOFFMAN​: It’s one thing to sell the idea of savings to cash-strapped professors and
companies. What about the rest of the Swiss Army knife? Here, Diane faced another hurdle.
Customers were willing to dip a toe into the wild world of virtual machines. But it was a
newfangled technology. What is a virtual machine anyway? It sounds like something that could
wipe out all of your company’s data in a virtual nightmare. Diane recognized the problem.

GREENE​: So initially, we were reasonably smart about it, where we said, "Look,
nobody's going to run their server on this. They're not going to trust it to run all their
mission-critical.”

HOFFMAN​: It was clear that companies weren’t going to thrust their core business into a new,
untested product. Rather than sell the whole Swiss Army knife, she focused on the most
pressing use-case. It was as if she said: “Forget the blade, the scissors and the screw—let’s just
sell the tweezers.” In her case, she picked a tiny group of potential users: Linux developers.
There was a tiny group of developers who just loved the Linux operating system—but they
hated the way Linux wouldn’t play nice with the dominant operating system, Windows. Diane felt
their pain.
 GREENE​: And where is the biggest pain point? Well, it's all these Linux developers that
have to run Microsoft Outlook for their mail, and so they have to have two machines,.
Well, we fixed that.

HOFFMAN​: Now you don’t have to know a thing about Linux developers to appreciate this twist
in this story. Turns out that Diane Greene had marketed a tool to one of the fastest growing
professional groups in Silicon Valley. Linux developers were all the rage. They took off like a
grassroots geek movement.

GREENE​: Some VC called me up, and he's like, "How did you know that Linux was
going to take off, and you were the perfect tool?" I'm like, "We had no idea Linux was
going to take off, we just knew it was the perfect first market for us." And also, we knew
they were really technical users, so they'd be more adventurous, and so that's where we
started.

HOFFMAN​: Notice the term she used here—she targeted “adventurous users.” Now some
products don’t require adventurous users. One tweak makes it instantly appealing to any and all
users. It takes off overnight, and then the market is in full-view, waiting to be captured. Should
that happen to you, congratulations. You’re awfully lucky.

Most entrepreneurs start off to the side of the market of their dreams, serving a tiny cohort of
users. They’re a passionate bunch. You may even have an affectionate pet name for them. At
PayPal, we called our first diehard fans the power sellers. They peddled huge volumes of
merchandise on eBay. At LinkedIn, we had the LIONs, which stood for “LinkedIn Open
Networkers.” They were always asking us to make every member of LinkedIn, including busy
CEO’s, reachable via email. Not the best idea, but we appreciated their enthusiasm.

And for Diane, her adventurous users were the sysadmins—or system administrators. And
these people have a ton of clout. They can channel a corporate IT budget to whatever solution
makes their lives easier.

Diane learned that when you make a sysadmin happy, even with the functional equivalent of
pair of tweezers, they’ll start eyeing the whole Swiss Army Knife.

GREENE​: Sysadmins started realizing this was an amazing tool for us, for playing
around with operating systems. So we had a huge sysadmin population, and then they
became evangelists, so when we had the server product, they wanted to run it on their
servers.

Our user conferences were almost like the original Apple user conferences—a lot of
passion and excitement. And we'd have these all-night raves, where people would use
this, and we’d build a huge data center at the conference to get people certified.
HOFFMAN​: By the way, these little-known VMware raves are still raging. YouTube the words
“VMware World,” and you’ll get a glimpse of their customer appreciation parties. The
champagne is flowing. There are no mosh pits as far as I can tell, but who knows what the
sysadmins are up to when they’re beneath the trees where nobody sees.

So in one sense, Diane was lucky to find her way from college professors to bankrupt
companies to Linux developers to the whole sysadmin community and their secret all night
raves. But there’s a hidden logic to her sideways journey. It comes from a question that Diane
posed earlier. It’s a fantastic question to ask about your users.

GREENE​: Where is the biggest pain point?

HOFFMAN​: It’s a time-tested path to scale. Set aside for the moment your fantasies about what
your product might become, and sidle up to the users who need part of it right now. The more
indispensable you are to these users, the more receptive they will be to your larger pitch.

And before long, you too can sell the whole Swiss Army knife.

GREENE​: We were on a track to do $100 million, growing over 100% percent a year,
high margin.

HOFFMAN​: In 2003, from this position of strength, Diane and her partners sold VMware to EMC
for $625 million. Five years later Diane stepped down as CEO. In 2012, she joined Google’s
board of directors.

But every once in awhile, she had this nagging thought. As massively as VMware scaled, she
was convinced it could have been bigger. She was still looking sideways, to the market they left
behind. That market eventually became known as the Cloud.

GREENE​: We called ESX Server "ESX Server" because it was "elastic sky"—the "ES" in
ESX is elastic sky. And this is long before anybody had coined the term “Cloud.” So you
could imagine the pivot would've been to say, "OK, now there's a Cloud with VMware."
And then that would've been a much bigger market than we'd ever dreamt of. But we did
dream of the market that it has.

HOFFMAN​: So in layman’s terms, the opportunity she’s describing here is this: “Look, we got
customers to move their information to these virtualized machines. We could have convinced
developers to write apps directly to those machines. That means we don’t have to worry about
software. We don’t worry about devices. We don’t worry about end users installing updates. All
of the computing moves to the Cloud.”

She even had the language right—“elastic sky.” It was quite an opportunity.
I’ve heard investors and entrepreneurs talk like this before. They’ll say things like, “I had all the
right ideas for breakthrough technology X. I was just a little early before the technology, but I
had the idea!” And sometimes that’s true. In Diane’s case, I think it’s absolutely true. You could
reasonably argue that the Cloud exists because of Diane. She built the bridge, and got
everyone into the ether.

But here’s the thing about Diane: She doesn’t let a big idea languish. To this day, she’s pivoting
toward that big opportunity. The idea came at her as you might expect—sideways.

GREENE​: You know, I was on the board of Google—now Alphabet—and had been one
day a week going over to try and see if I could be useful to the Cloud folks, and getting
to know Urs Hölzle pretty well.

COMPUTER VOICE​: Urs Hölzle was employee number eight at Google, and their first
VP of engineering. He’s now Senior Vice-President of Technical Infrastructure.

GREENE​: Urs and I lived near each other, so we started walking our dogs every
Saturday.

Now our dogs are so old, we have to walk almost without our dogs—or if we walk with
our dogs, we can't go very far. [Laughs] That's how long we've been walking our dogs.

So I was like, you've really got to bring in someone to run the Cloud business. This thing
is happening, Google really needs to play in this space.

And they were being really choosy, and they were constantly saying, "Oh, we think it
needs to be you." And I thought it was just them being nice to me, and I was like, "Yeah,
sure." And actually, we found someone that I thought was really smart.I thought they
were going to hire him, and basically what happened, I was at a board meeting, and I
was like, "Sundar, did you hire him?"

And he's like, "No, we decided not to." And it was at that point I was just like, “Maybe I
should do this.” So they were like, "Good." And so then we started a discussion.

HOFFMAN​: That discussion led Diane to her newest position, Senior Vice-President of Google’s
Cloud division. She agreed to lead Google’s charge into the Cloud, on one condition.

GREENE​: I didn't sign up for it unless they were going to let me merge sales, marketing
and engineering into one group, because they were completely under separate
management.

HOFFMAN​: And once again, Diane is incredibly bullish on Google’s market opportunity. She
argues that Google has hardly even begun to tackle this market. Gmail, Google Docs and
Google Drive —that’s only the beginning. Once you draw whole organizations into the Cloud, it
opens up unfathomable opportunities. Once again, she has a Swiss Army knife in the making.

GREENE​: But now, we could serve every company in the world, in every geography, in
every type of organization. And so it wasn't very hard for people to get excited about
that, because it was this huge expansion of the impact we can have.

HOFFMAN​: Looking back at the arc of her career, there’s only one thing that Diane might do
differently—a slightly more defined plan would be nice.

GREENE​: I would personally do more planning. That would be the only thing.

HOFFMAN​: I’m going to make a prediction here: Diane will actually write up that plan. And then
her most scalable ideas? They’ll come at her sideways.

I’m Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Eric Schmidt

ERIC SCHMIDT​: My first office at Google was an 8-by-12 office, just enough room for
me and my desk and my little chair. And one day I walked in, and I find I have a
roommate. I said “Hello.” He says, “Hello.” I said, “Hi, I'm Eric.” And he goes, “Hi, I'm
Amit.”

REID HOFFMAN: ​That’s Eric Schmidt. This story happened on his first day as Google’s CEO in
2001.

SCHMIDT​: Now as a new person coming into the company, it’s very important to not
create a cultural faux pas. Like it would be incorrect to say, “I'm the CEO. Get the heck
out of my office.” So I looked at my secretary and said, “Did you know anything about
this?” And she said “no.” And I said, “Well, who said you could move in?” And he said,
“The VP of engineering.” And I said, “Ah, they playing a joke on me.” And I said, “Well,
why did you move here?” “Well, because I was in a six person office, it was very
crowded, and your office was empty.” So we became colleagues.

HOFFMAN: ​So was Amit playing a joke on Eric? Oddly enough, Eric doesn’t say. He drops the
investigation. Amit offers no further explanation. They settle into their work, and do a fine job of
ignoring one another.

SCHMIDT​: He would put his headphones on and I would talk on the phone. I’m calling
the vice president of sales. And at the time the revenue was estimated about 120. And I
said, “Don't you think you could do better?” And he said, “Well, I think we can get to 123,
124.” “Come on push harder, push harder.” And as I hang up the phone, Amit takes his
headphones off and said, “I can tell you what the revenue is going to be.”

And I said, “I knew you were listening into my conversations.” And so I said, “What's the
revenue going to be?” And he said, “It’s going to be 138.” I said, “How do you know
that?” “Because I build the analytics that predict this.” And so I didn't tell the sales
people, and I watched—and they kept moving their forecast up, and hit 138. It was a
really easy lesson to understand the power of data analytics, plus having a great
roommate.

HOFFMAN: ​Amit eventually built a tool that accurately predicts how much revenue the company
had at any given time, down to the second. Pranks and productivity tend to blend together at
Google, which is why Eric doesn’t dwell on the question of why Amit moved in to begin with.

SCHMIDT: ​We were roommates and literally officemates for years. We became such
good friends.

HOFFMAN: ​I would argue that a dash of insubordination is the secret ingredient to Google’s
success. Ideas emerge organically through conversations like the one Eric and Amit had in their
cramped executive suite. There’s only one way to keep those unruly conversations going. You
let them unfold chaotically, anywhere and everywhere across the organization. And you listen
for what bubbles up. If you want your company to innovate, your job is to manage the chaos.

[THEME MUSIC]

HOFFMAN: ​This is Masters of Scale. I’m Reid Hoffman, co-founder of LinkedIn, partner at
Greylock and your host. In this episode, I’m going to make the case that the best managers—of
the most innovative organizations—don’t tell their employees how to innovate. They manage the
chaos. I’ll prove that to you with stories from the smartest entrepreneurs I know.

If you want an innovative company, your job is to manage the chaos. Managing chaos may
sound like a contradiction in terms. Shouldn’t it be the opposite? Isn’t the manager’s job to wring
order ​out​ of chaos? Not always.

If you want to invent something new, or reinvent something at a spectacular order of magnitude,
you have to suppress management. Let your employees pursue wild ideas that may raise your
eyebrows. It’s not for you to judge whether their ideas are good or bad. It’s for your employees
to prove it through freewheeling experimentation.

I wanted to talk to Eric Schmidt about this, because he pushes the anti-management philosophy
to its outer limits—as CEO of Google, and now as chairman of the parent company, Alphabet.
He’s an unlikely proponent of chaos, because he came to Google from a company that nearly
crashed due to lax management. Before Google, he was CEO of the software company Novell.

We’ll start the story on his first day at Novell, when he discovered the company’s financials
weren’t all they were cracked up to be.

SCHMIDT​: The reality, of course, hit on the first day, because I was presented with
different numbers for revenue for the quarter than I'd been told when I was interviewing.
And by that Wednesday, third day in the job, we were in a real crisis.

We had a month which we called the worst month, where everything was failing, and it
was clear that the business was in very different trouble. And there was a moment in that
month where I remember saying to my colleague, “I just want to get out of here with my
integrity intact.”

HOFFMAN: ​There’s only one way to take your mind off of a disaster on this scale—flirt with
scarier disasters.

SCHMIDT​: My friend said, “You need a distraction. And if you're flying planes, you won't
be able to think of anything else.” It was the best advice ever. I eventually figured out it
 made a big difference, shockingly to me—because in aviation, they teach you to make
rapid decisions, and they, over and over again: “Decide, decide, decide.” It's better to
make a decision and just accept the consequences. And that discipline helped me in the
hard times when I was at Novell in a real hard core turnaround.

So I approached aviation the same way I approached the company, which was trying to
figure out how it actually worked. And once you figured it out, if it's a well-defined
system, it has a certain logic and a certain beauty in it.

HOFFMAN: ​I want you to notice two things in this story. The first is the way Eric thinks about
companies:

SCHMIDT​: If it's a well-defined system, it has a certain logic and a certain beauty in it.

HOFFMAN: ​He’s thinks of a company as a system that he has to understand. The other thing I
want you to notice is what flying taught him about decision-making:

SCHMIDT​: In aviation, they teach you to make rapid decisions, and they, over and over
again: “Decide, decide, decide.” It's better to make a decision and just accept the
consequences.

HOFFMAN: ​Both of these habits will serve Eric well as he lands in Google’s chaotic system.
And he’s about to land. That opportunity came in the form of a fateful phone call.

SCHMIDT​: I got a call from John Doerr, a good friend and venture capitalist, who said,
“You should come over and talk to Google.” And I said, “Oh, it’s just a search engine.”
He said, “Well, you'll enjoy it.” And I said, “Probably not.” But I figured I'd go visit,
because I'm curious. And I walked in, and here's Larry and Sergey—

VOICE: ​Larry Page and Sergey Brin are the two founders of Google.

SCHMIDT:​ —Two young men. They had my bio all on the wall, and they had food on the
table in front of them. I thought, “This is very odd.” And they proceeded to spend an hour
and a half grilling me about what I was doing at Novell, and deciding that it was
foolish—that the products we were building made no sense. And I, of course, provided a
blistering counterattack. And as I left that day, I realized that I hadn't had such a good
conversation in years. And that was the moment I knew this was a special company.

HOFFMAN: ​You might find it odd to hear a “blistering counterattack” described as a “good
conversation.” But I’m not surprised by Eric’s reaction here. He knew how rare it was, as an
executive, to find a team that’s willing to challenge you. And this feisty, free-thinking team just
might push him to top of his talent.
Not every CEO is cut out for this kind of insubordination. But the most innovative ones welcome
it. I asked Margaret Heffernan to give us a perspective on this. Margaret was the CEO of five
tech companies, and she gave a TED Talk called “Dare to Disagree.” So I thought she might
have an opinion on Eric’s reaction.

MARGARET HEFFERNAN: ​Any CEO worth their salt is starved for argument and
debate, so I’m not incredibly surprised by Schmidt’s response—because one of the big
problems with power is that most people won’t argue with you if you’re in a powerful
position.

They mostly try to second guess you. They try to figure out, “What is it you want me to
say?” And of course that’s no use at all, because being told what you think you want to
hear doesn’t give you any options. You’re kind of stuck in your own head.

HOFFMAN: ​You have to be able to butt heads. But there’s an art to disagreeing well.
High-speed, high-IQ conversations often have the rhythm of “point / counterpoint.” That’s how
you move across​ ​the intellectual space quickly—I say something, and you say, “Well, actually,
this part of what you're saying isn't quite right. Here's the better version.”

Some people naturally excel at this kind of conversation. For others, it takes practice. Technical
people, for example, usually need to learn that you don’t have to start the conversation with,
“You’re wrong,” or, “That’s the stupidest idea I’ve ever heard.” Far better, you can say, “That's
interesting. But here's a challenge to that point of view.” And if you do it that way, you frequently
make more progress, because then people are less hung up on whether “I’m right,” or whether
“I’m wrong,” and stay focused on the idea.

As Eric ventured outside the executive suite, he found idea-generating conversations unfolding
across the company.

SCHMIDT​: I think a fair statement is that the founders built the company in the image of
what they saw at Stanford graduate school. So the offices for example, if you had them,
would have four people in them—which is the number of graduate students that are in
an office. And of course, everyone's very crowded, and it's very casual. And of course
there's free food, and everyone is sort of hanging out all day. And that graduate student
culture—that sense that somehow we're about to discover something new—permeated
the decision making. So the culture of food and benefits and being quirky came from the
founders trying to recreate that feeling.

HOFFMAN: ​Amid this creative ferment, his job was simple. He just had to give employees a
slight nudge to deliver on their promising ideas.

SCHMIDT​: The first thing I did as I went to the staff meeting. And the staff meetings
were long, and they were like being in graduate school. “What do you think of this? What
 do you think of that?” But a real lack of business procedures, and that kind of thing,
which were easily remedied.

HOFFMAN: ​When you’re surrounded by bright young minds, you don’t have to push too hard
for interesting ideas. They tend to tumble out of conversations or shared challenges, and take
you in unpredictable directions. But not every manager is comfortable with this type of chaos. It
requires a particular kind of leader who can embrace both ​humility​—the uncomfortable notion
that you don’t have all of the best ideas yourself—and ​uncertainty​—because you can’t always
schedule innovation on a predictable timeline.

I’m going to come right out and say it: If you’re a ​control freak,​ you’re going to have a hard time
with this.​ ​And if you find yourself relating to this song—it’s Jamie Leonhart, by the way—you’re
probably at least ​part​ control freak. And the hardest part for control freaks is when your team
suggests an idea that you find utterly reckless.

And that’s exactly what Eric thought when his team suggested a radical new way to set prices
on advertisements. What I’m about to describe may sound crazy to you—and it sounded that
way to Eric, too. Eric’s team made an argument for a type of auction, in which bidders name
their price, without seeing competing offers. The highest bidder wins, but only has to pay the
second​ highest bid. This is effective because it allows bidders to go high, knowing they will only
pay true market value. And there are plenty of academic papers explaining why this type of
auction would actually work wonders on revenue. But companies rarely put it into practice.

SCHMIDT​: I was ​absolutely​ convinced that this would bankrupt the company. And I was
so convinced, that I ordered a cash-restriction period, where the only thing that you could
do was spend money on Friday mornings, at 10:00. You had to come to my office and
you had to convince me that you needed to buy those pencils, or those computers, or
whatever.

HOFFMAN: ​You heard that right. Not only was he convinced it was a bad idea. He was
convinced that it would ​bankrupt​ the company​.​ So he forced all purchases to be brought to his
office in person.

SCHMIDT: ​And as we pushed this thing through, we turned it on, but we had no data
analytics, because no one had bothered to get that working yet. And we went into full
crisis mode for a week, meeting every day at 4:00 to try to figure out what to do. At the
end of the week, we realized we were making ​far​ more money, and we were able to go
from there.

It was that moment that I realized that both this team was magical, but also that the scale
of the search ads opportunity was immensely larger than even we had thought.

HOFFMAN: ​Notice how Eric is stunned by the success that emerged out of this chaos—he calls
it “magical.” And to harness this magic in an organization, you have to understand where ideas
come from—not just from individuals, but from networks of people. And this runs contrary to the
popular myth about innovation. We tend to tell the ​heroic​ story of innovation.

This is a story that credits a single inventor: the founder, the creator. A genius has an idea.
Everyone else executes on the idea. And then everyone waits for the genius to have another
idea.

But that’s a false story of innovation, and it breaks in at least two ways. First, while it’s true that
some people are much better at idea generation than others, it’s always better to have a
number of people working on ideas simultaneously. The best idea may come from person #89.
And you can’t always predict where the good ideas will come from.

And second, very rarely do ideas spring perfectly formed, like Athena from the brow of Zeus. To
turn a good instinct into a good idea, you have to talk to a lot of smart people, and ask them for
feedback and criticism. So having networks both within and outside the company to improve on
ideas is key to success.

Margaret Heffernan, former CEO of five tech companies and advocate of frank conversations,
has a great example of a time this worked. I asked her to tell the story.

HEFFERNAN: ​The piece of software we were running had a very specific problem,
which was what I would call a load balancing problem. It would just require too much
processing power. And the more customers we got, the more acute this problem
became. And because it’s such an existential threat, everybody knows about it.

And one Friday, one of my marketing people came to me and said, “You know, I’m not
an engineer, but I just had this idea.” So I call my CTO and I say, “Harry, what do you
think about this?” And he thinks about it for a minute, and he thinks, “I think I know how
we could do that.” So it was a really thrilling, not to mention kind of life-saving moment.

But what I think is especially interesting is, in very siloed organizations, or fearful
organizations, you wouldn’t share that problem. But actually, everyone knowing the
problem was what allowed us to solve it.

HOFFMAN: ​Margaret is right. No one in your organization has a monopoly on good ideas,
particularly when you’ve hired thousands of smart creatives.

What’s equally important to recognize, as an leader, is that ​you​, personally, are ​not​ the source
of all good ideas. My friend Mark Pincus learned this the hard way. He’s Co-Founder of the
gaming company Zynga, which pioneered the idea of blending games into social media. Before
Zynga, he built one of the first social networks, a little-known website called Tribe that didn’t
quite make it. I asked him to tell me that story.
 MARK ​PINCUS: ​It's pretty amazing, if you think about it, that I started one of the first
three social networks in 2003, and I managed to fail—at a time when everything worked,
I actually managed to fail. And the lesson from Tribe that came resoundingly out for
me—and still stands out—is that as entrepreneurs, part of the journey that we're on is
learning how to separate our winning instincts from our losing ideas. I think as a rule of
thumb, if you're a good entrepreneur, you can assume that your instincts are right 95%
percent of the time, and your ideas might be right 25% percent of the time.

HOFFMAN: ​By the time Mark launched Zynga, he was acutely aware of the dangers of
stubbornly sticking to his ideas. He started to draw the distinction between his usually-great
instincts and his not-always-great ideas.

PINCUS: ​I'll try anything, and I'll kill anything, and I'll kill it quickly. And I'm not going to
let killing an idea kill a winning instinct. And so that was a really core idea that I'm still
thinking about, and learning as an entrepreneur. And I can see it playing out so often in
people's companies.

HOFFMAN: ​Mark separates specific ideas—which must be killed when they don’t work—from
underlying instincts. And this willingness to kill ideas is essential to making innovation work. A
free-wheeling, idea-generating climate of open inquiry—like the one Schmidt cultivated at
Google—has to be matched with disciplined decision-making in order to thrive.

SCHMIDT​: The most important thing to do is to have quick decisions—and you’ll make
some mistakes, but you need decision-making. We ultimately adopted a model of a staff
meeting on Monday, a business meeting on Wednesday, and a product meeting on
Friday, and this was organized so that people could travel in the right ways. And the
agenda was, everybody knew which meeting the decisions were made at—and so as
long as you could wait a week, you knew you would get a hearing on your deal.

I cannot tell you how many people have told me that at Google, decisions are made
today quickly, in almost every case, even at our current scale. And that's a legacy of that
decision. Most large corporations have too many lawyers, too many decision-makers,
unclear owners, and things congeal—they occur very slowly. But some of the greatest
things happen very quickly. We made the decision to purchase YouTube in about 10
days—incredibly historic decision—because we were ready, people were focused, we
had a board meeting—we wanted to get it done.

So I always tell people, somebody is running your company. What are they doing? Why
don't they just make this decision? Even if it's the wrong decision, a quick decision is
better in almost every case.

HOFFMAN: ​This combination of inventive, bottom-up ideas and focused, top-down decision
making has guided Google’s growth over the past 16 years. But the two forces don’t always live
together comfortably. Eric took some radical steps to keep ideas flowing in the organization.
This meant empowering engineers, and keeping management in check. For instance, product
leaders can draw in as many engineers as they’d like on any given project, so long as they can
convince engineers to join their team.

I've talked to other managers at Google who are frustrated with this, because they argue: “We
agree that my project is strategic. Why don't you just assign some engineers to me?” And the
answer is, “No, no—you have to persuade the engineers that your project’s a good one to work
on. And then, by the way, you can have all of the engineers that you can persuade to work on
that project.” And that's central to Google’s culture for making progress.

Eric took this idea one step further. He granted employees the freedom not only to choose their
projects, but openly defy their managers along the way. Google famously instituted a rule that
any employee could devote 20% percent of their work-week to any project they’d like.

20% percent time was, in some ways, a logical extension of Google’s graduate school culture.
Managers, like research advisors, can set timetables and budgets for experimentation. But the
staff, like the “students,” pick the research agenda.

SCHMIDT: ​Many, many initiatives in the company have come out of 20% percent time
ideas. Much of the mapping work, many of the search ideas, many of the advertising,
many of now the AI work, have come from people working and practicing in new areas.

HOFFMAN: ​As Eric says, many of the products people know best—Gmail, Google Maps,
Google News, AdSense—grew out of ideas generated by employees, during this 20% percent
time. But ​why​, exactly, does it work?

SCHMIDT​: And while the rule says you can do anything you want to with your 20 percent
time, these people are computer scientists and engineers, they’re not going to veer too
far away from their core business—and that is the genius of 20% percent time.

HOFFMAN: ​The tendency of high-performing employees to use their 20% percent time
productively is the ​well-documented​ genius of the program. But there’s also a ​hidden​ genius of
20% percent time. It allows ​reasonable​ employees to defy ​unreasonable m ​ anagers. And this
institutionalized defiance can help balance the power, and keep high-performing employees
engaged during challenging times.

SCHMIDT​: So the interesting thing about 20% percent time is although it's reported as,
“You get to spend one day doing whatever you want,” what it really served as was a
check and balance on the power of the engineering management over the subject.

So if an employee is under pressure, the manager says, “You've got to work harder,
you've got to give me everything you have.” That employee can legitimately look that
 boss in the eye, and say, “I'll give you 100 percent of my 80% percent time.” And that
simple principle—which never really happens in practice, but it's understood—empowers
the employee with both dignity, but also some choices.

HOFFMAN​: Was there anything that you regretted that came out of the 20% percent
time?

SCHMIDT:​ No, because 20% percent time was understood as likely to fail. Part of your
compensation was your ability to try new ideas and fail. The value of that failure is
incalculable, because you tried something, it didn't work—well, then you try something
else, it doesn't work. Persistence doesn't mean marching on the same program, against
the same hill, with the same sledgehammer, or whatever metaphor you want.
Persistence means you keep trying, but you change your tactics. You modify your
strategy, you think differently about how to solve the problem, and you don't give up.

HOFFMAN:​ So step one of managing the chaotic process of invention is allowing ideas and
conversations to flow freely in an organization. Step two is making quick decisions on what’s
working, and what isn’t. But step three is even harder: deciding the precise moment you should
scale that idea to the world. And this requires an explosive change of pace.

As soon as Eric saw the potential of Google’s new advertising model—the one driven by auction
pricing—he turned to his colleague Omid Kordestani and asked about global sales. Turns out,
international sales were non-existent. Eric saw an opportunity—and he acted.

SCHMIDT​: And so I said, “Omid, go to Europe next week, and don't come back until you
have a European office set up.” And he looked at me and he said,

OMID KORDESTANI​: “​Really?”

SCHMIDT​: And I said, “Yes.”

KORDESTANI: ​It was very clear to him that, “Look, we just need to fire on all cylinders.”

HOFFMAN: ​Yup, that’s Omid Kordestani, who’s now executive chairman of Twitter. He told us
what he was thinking at the time:

KORDESTANI​: ​I need to get on a plane, and go set up these offices, and interview
people, and set up our operations. I’ll start with London.

SCHMIDT​: He left on a Sunday night from California to London.

KORDESTANI​: ​I literally started going to hotels, and setting up meetings in hotel rooms.
And I tapped into my network a lot of times—sometimes I used recruiters—but it was
 initially literally sitting in hotel lobbies and interviewing candidates one after another.

SCHMIDT​: And by the end of that week, he had hired the head of our London operation,
and had identified heads of our Paris and Hamburg operation. So, a very productive
week.

KORDESTANI: ​To me, it was exciting that we’re taking this company, and now giving it
wings across the globe.

SCHMIDT​: Today, Europe is 50% or 60% percent of the profits of a

hundred-billion-dollar corporation. Think about if we'd waited a year, how much smaller
that number would be. So moving and establishing a global revenue source quickly is
key. And in hindsight, I would do that over again, and I would have done it even faster.

HOFFMAN: ​Knowing when to scale is perhaps the single most valuable decision a manager
can make. And because Eric was practiced in making fast, informed decisions, he was ready
when the time came.

I want to offer a note of caution here. I would never advise an entrepreneur to blindly copy
Google’s rules and announce to their teams, “Okay, you all get free meals, 20% percent time,
and the freedom to camp out in the CEO’s office. Now: start innovating.” That’s not a recipe for
managed chaos so much as plain old chaos. As Eric said, you have to see your organization as
a complex system that operates by a logic and beauty of its own.

You have to understand how your staff operates as a network. And you’ll never build this
network simply by announcing playful rules. You have to first recruit the right people who tend to
swap ideas and tackle challenges together. To effectively manage the chaos, you have to hire
people who thrive under chaotic circumstances. Remember how most people feel about chaos:

And here we come to another secret of Google’s success. They’ve managed to quadruple in
size each year, while ensuring that every last hire was, in Schmidt’s terms, a “smart creative.”

SCHMIDT: ​So the company was getting very large, very quickly. And I had suggested to
Larry and Sergey that there was a problem with what I called “glue people.” And glue
people are very nice people who sit between functions, and help either side, but don't
themselves add a lot of value. And I thought, “These are nice people, but we don't really
need them. We can have these groups talking directly.” And Larry looked at me and
says, “We could solve this problem, if you would just review all the hiring.” And I said,
“Larry, we can't look at all the hiring.” He said, “Sure we can.”

So the company, of course, invented a number of hiring algorithms, which are used
throughout the industry today. Many of them include pretty aggressive hiring interviews
from peers, asking people to do work, and so forth. Ultimately, the judgment has a lot to
 do with whether the person is interesting or not. And so we would, for example, take a
position that we want to hire rocket scientists, because rocket scientists are inherently
interesting. And in sales, we love to hire Olympians. Or Super Bowl winners, or football
players—because of the discipline that they had in their lives as young people—men
and women—to get to that point indicated that an extra set of discipline.

HOFFMAN: ​I want to acknowledge that most companies don’t have the option of hiring rocket
scientists, Olympic athletes and Super Bowl winners. But Eric does have more pragmatic advice
for companies that can’t set the bar at Himalayan heights.

SCHMIDT: ​So today I would suggest that—and this has since been confirmed by many
studies—that persistence is the single biggest predictor of future success. And so we
would look for persistence. And the second thing was curiosity. What do you care about?
The combination of persistence and curiosity is a very good predictor of employee
success in a knowledge economy.

HOFFMAN: ​Suppose you’ve copied Google’s entire system for innovation, end-to-end. You’ve
hired smart creative types, cultivated a culture of experimentation, and set up a decision-making
framework that enables you to scale the best ideas without delay.

None of these steps, on their own, will unlock innovative ideas, unless people are also sharing
information across the organization, from the C-suite to the frontlines.

And this principle extends beyond the organization as well. Your users can surprise you as
much as your staff. Eric shares a story that I think gets to the very heart of the innovative
process. It starts with the release of Google Earth, and ends with a journey into the inner
workings of a cow brain. Allow Eric to explain.

SCHMIDT: ​The most interesting thing about cows is that they organize themselves north
and south, and they do that north and south because of the magnetic resonance inside
their cow brains. How was this discovered? Because of Google Maps.

HOFFMAN:​ That’s because Google Maps offered researchers the first comprehensive view of
cow herds across the world. They zoomed in on herd after herd, and observed the same curious
formation—snouts and tails, aligned north to south. This observation sent researchers on a
whole new path of inquiry. And who could have predicted that path?

So the next time you try to control where inquisitive minds might go in your organization — ask
yourself: Do you really know what they might discover? Are you really prepared for the “cow
brain” scenario? If not, then prepare to be shocked. Eric expects it.

SCHMIDT​: Learning about human behavior, and how people actually live and work, is, I
think, always a shock. Humans are much more varied than you and I think they are. And
 most people don't know it, or don't pay attention to it.

HOFFMAN: ​I’m Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Ev Williams

REID HOFFMAN: ​Silicon Valley tends to lionize entrepreneurs who take hairpin turns in their
careers. The sharper the turn, the greater your prestige. Steve Jobs made his name not just at
Apple but through his diversion to Pixar and back again. Elon Musk is approaching demigod
status with Tesla. SpaceX. Hyperloop. And the Boring Company. His career is downright
swashbuckling.

Those daring, shape-shifting figures can inspire us to shoot for the stars and burrow through the
earth — at the same time. But watch them too closely, and you may derail your own destiny.
You may start telling yourself something like this.

EV WILLIAMS:​​I should do something completely new and different. Maybe I’m just stuck
in a rut…

In some ways, that didn’t excite me, it felt a little bit derivative of the things I had already
done…

I actually hesitated because I’d been doing the same thing for so long.

HOFFMAN: ​That Hamlet of the entrepreneurial world is my friend, Ev Williams. The Ev

Williams. He’s the co-founder and former CEO of Twitter. Before Twitter, he was Co-Founder of
the service Blogger. Those two services transformed the way we communicate online. They
popularized verbs like “blogging,” “tweeting” and “following” — of course, “following” predates
Twitter, but it was redefined by it.

With Blogger and Twitter under his belt, you’d think this maestro of online communication would
double down on his next disruptive venture in the world of self-publishing. But this is where
Silicon Valley’s obsession with all things “new” and “different” can go a bit too far. It can lead
established entrepreneurs into an eddy of self-doubt, until they’re circling around questions like
this.

WILLIAMS:​​ Do I want to actually do this? Is that my thing? That’s a big decision.

HOFFMAN: ​Fortunately, Ev made that big decision.

WILLIAMS​​: It’s very valuable to do the thing you’re obsessed with that you just think
about all the time. If I have all of this time and intuition that has been built, that’s an
investment, that’s actually an asset. But like, not doing this I thought I would regret much
more.
 What excited me originally was just that feeling you get sometimes from technology of
the seeming magic to it; you did something, it was just delightful to have this idea in your
mind, and it’s on a webpage, when you create something yourself and you’re like, “Oh,
wow, I did that.”

HOFFMAN:​​ And like that, Ev launched his third venture: Medium, a one-stop shop for every
thoughtful, medium-length article online. Medium is Ev’s third attempt to reinvent the world of
self-publishing in his long, but not so winding career.

Make no mistake — while a career that twists and turns and nearly flies over a cliff is certainly
fun to watch — it’s not necessarily the path you should follow. In fact, if you’re a thoughtful,
reflective, mission driven entrepreneur, like Ev, you may find yourself chasing the same big
idea. Again and again, you return to it, sometimes wittingly, sometimes unwittingly.

And just when you think you’re out, it pulls you back in — to quote Michael Corleone from the
Godfather part III.

But here’s the thing, you shouldn’t feel fatigued by the repetition. Instead, you should celebrate
your single-mindedness, your focus. I believe you can never know the full reach of your first
idea. It could span your entire career.

[Theme Music]

I’m Reid Hoffman, founder of LinkedIn, investor at Greylock and your host. I believe you can
never know the full reach of your first idea. It could span your entire career.

There's a set of entrepreneurs who see a transformative change taking place in the world — a
change that is so profound they can spend a lifetime playing out the possibilities in their heads.
They say to themselves, “I know the world's moving in one particular direction and I’ll just keep
betting on the world going in that direction.”

And suppose you’re right — the world does, in fact, start moving in that direction. You’ll be
surprised how many times you’ll want to ride that wave. It doesn’t matter if you end up having
the ride of your life or an epic wipeout — you’ll just keep paddling after it.

Ev Williams and I are similar in this regard. Ev, to me, is the embodiment of the serial
entrepreneur who’s been riding the same massive wave of change throughout his career​.

And to understand how Ev first caught this wave, you have to go all the way back to his
childhood — to a farm outside of Clarks, Nebraska.
 WILLIAMS:​​ It was a very small town. It was around 400, 450 population. Where I grew
up, we were actually outside of town, so we drove four miles to school, and there were
12 to 14 kids in my class from K through 11.

HOFFMAN​​: And in this tiny community, Ev didn’t exactly fit the mold.

WILLIAMS: ​It was a very isolated experience. It was literally in the middle of cornfields.
You knew everybody. Football was the main interest of people that brought the
community together, lots of sports, lots of hunting, not much else. And that was my life.

HOFFMAN: ​That was his life in the real world at least. But Ev, like many lonely kids in the 80’s,
was leading a double life. He had one foot planted in Clarks, the other planted in the virtual
world. It turned out his family farm was just the right place for Ev to get an early introduction to
the dawn of computing.

WILLIAMS​​: My dad had—did have a computer in the ‘80s. He was an early adopter for
farm purposes. So he had an IBM PC with some spreadsheet software and different
farm software. I tried to figure that out. Didn’t really succeed much. But then in high
school, we had some Apple IIs in our computer lab. We had mandatory basic
programming when I was a sophomore, and I loved it.

That was when I was just stricken by, oh my gosh, I can—this works for my brain. I
stayed up late. On more than one occasion, the school shut down, the lights were shut
off, and the doors were locked while I was still sitting in that computer lab.

So, that feeling of flow that you’re really just doing something that is creative, and
exciting, and technical, and hard, and that’s when I felt that.

HOFFMAN: ​Programming was just the spark for Ev. What really set his imagination on fire was
​ agazine. Ev still remembers the piece to this day.
an article in ​Wired m

WILLIAMS:​​ I picked up the second ever issue of Wired on a newsstand. I remember

talking about connecting all the brains on the planet, and about the instantaneous
publishing of text and ideas, and all these utopian ideals.

HOFFMAN: ​Utopian as it may have been, Ev took it deadly seriously.

WILLIAMS: ​That got me very excited. And I got it because of playing with bulletin
boards. And I had a PC at the time that I would dial into things with, and that just
immediately, I found very exciting.
HOFFMAN: ​Now this is the wave that Ev will start riding. From the outside, it might seem like
his passion is to empower self-expression. But there’s a deeper force that will carry him from
Blogger to Twitter to Medium.

WILLIAMS: ​I have been focused on essentially the same problem throughout most of
my career. The Internet was very exciting because of this idea that all these minds were
connected.

And that there is great stuff in these minds out there in the world somewhere. And the
Internet is this big machine that takes certain bits from these minds and puts them in
other minds.

And so to me that’s like this fascinating possibility, and then these tools that we build are
like different approaches to make that machine work.

HOFFMAN: ​Now this idea of connecting minds into one great, big thinking machine may sound
a bit abstract. But over-arching visions often are. It’s exactly what makes THIS kind of vision one
that can stretch over an entire career.

But the challenge of these big, broad areas of fascination is you don’t always know how to start.
And your biggest opportunities will change from year to year.

Technology changes, business changes, competitors change the landscape.

But if it’s a vision that’s meant to guide you, you’ll start to feel the pull. And Ev felt an early pull.

WILLIAMS​​: I was trying to think of, what’s the business? What’s the product that I can
do on this? So, I was thinking very creatively with what can I create that I actually know
how to create? And though I had programmed, I didn’t really know much about how to
do that. So, I just said, well, the biggest problem with the Internet is most people don’t
know how to use it. So, we need to teach people how to use it.

HOFFMAN: ​Now bear in mind, we’re talking about the late 80’s internet — which was a
decidedly unwelcoming place for people who didn’t know how to code. The web had just been
invented. Only a handful of people had email addresses. The first step toward Ev’s vision was
simply to get people online. So he created a guide for the confused internet user.

WILLIAMS​​: So, I thought, the way to teach people how to use this is to show them, so I
made a video on how to use the Internet — we actually made a VHS tape. And it was
just before the web, actually, was taking off.

And so, the World Wide Web, of course, makes a brief mention. But a lot of it was
command line, how to FTP a file, and how to email with Pine. And it was an incredibly
 tedious and incredibly amateur how to use the Internet video. That was my first Internet
product.

HOFFMAN: ​This may sound like a quirky high school project. But this idea — that the internet
should be easier to use — is actually the wellspring of Ev’s creativity. Throughout his career,
he’ll keep returning to the same question: what’s preventing people from sharing their thoughts
online? The question never grows boring, because the answer is constantly changing. It evolves
along with technology and culture.

I actually think Ev and I are similar in this way.

As you may have noticed, I’m really interested in how people connect online. My interest
pre-dates LinkedIn and PayPal. It predates my investments in Facebook and Flickr.

It began back in the 90’s, when I began studying the original online communities. Where could
you meet other users online? You could go play in a virtual world, you could join a chat room,
you could post on a message board, and so forth. All of these unregulated spaces were sort of
like costume balls — you arrived in any sort of disguise you liked.

There was a New Yorker cartoon at the time that summed up the pervasive failing of mistrust.
Sheryl Sandberg, Chief Operating Officer of Facebook, reminded me of it in our interview.

SHERYL SANDBERG​​: It's hard to remember but you know this is where they had that
cartoon you know with the dog at the computer saying, “On the Internet, no one knows
you're a dog.” The whole idea behind all the stuff we did online was anonymous.

HOFFMAN: ​You could be an angel one minute and a troll the next minute — and no one would
know you were the same person — just unleashing your superego and your id. And that’s what
it meant to go online — to alternatively present and disguise yourself — to be part you, part
fantasy. And a lot of people figured that this was just the very nature of our online identities.
They wouldn’t match the real world and they never would.

But then there were the optimists — like me — who couldn’t stop thinking about the power of
these communities, once users could shed the role-playing habits — and really be themselves.

People like me would say to the skeptics: no, no, these patterns, this participation in these
networks, these communities, these communication tools, these are all part of our real world
and what really matters to us is our real-world identities and our real-world lives. The change
was coming — and the bets you could make on that change were mind boggling. And that’s the
long game I’ve been playing ever since. I suspected at the time that this change was huge — I
could never have known where it would take me — and how much I would learn along the way.
But this intersection between the online world and the real one, that remains the guiding force of
my career.
And Ev, as we’ll see, also has a guiding force. After creating that VHS guide to the Internet —
he followed the natural pull to move to Silicon Valley, where he worked for O’Reilly Media,
writing technical manuals for the first generation of web engineers. While he was there, he
started a website called “EvHead.com” where he captured his own thoughts.

WILLIAMS:​​ It was one of those scratch your own itch things. So, I had had a personal
website and started reading what people called weblogs at the time. I was like, well, I’m
gonna make my EvHead.com into a weblog. And because I knew how to write code and
web applications, I wrote a very simple script that let me go and type in a box, and I hit a
button, and that was at the top of my homepage. And I remember doing that, and it’s that
feeling that we’re all very familiar with now, where you have a thought and you consider
putting it on the Internet, and closing the gap to doing that to literally seconds.

That’s where the inspiration came from.

HOFFMAN: ​Ev called that tool “Blogger” — and it’s the reason the term blogging stuck. More
importantly, it was outside of the quirky little community of programmers. Blogger heralded a
much bigger shift in online behavior.

The more people come online, the more accustomed they became to sharing and consuming
ideas in this way — and then Ev builds a solution that taps a geyser of self-expression.

When a blogger posted to the internet, they essentially live streamed their lives in as much
detail as they pleased. Stranger still, they invited friends to follow and reply in the comments
section. And that behavioral shift paved the way for Facebook, Twitter, LinkedIn, Airbnb and any
other social site or marketplace that simply couldn’t exist in a world of anonymity.

As blogging took off, Ev devoted more time and more people to his growing platform. But he
wasn’t quite sure how to turn Blogger into a viable business. He had raised a seed round of
$500,000, but it was dwindling.

WILLIAMS: ​That money ran out in late 2000, that was, for us, the beginning of the dark
times.

I sat the team down and said, “Look, in two weeks, we’re not gonna be able to pay you.”
So, essentially, this is the last paycheck we can pay. We had already like skipped one. I
told them, “You’re welcome to come back tomorrow. I’m gonna come back.” But none of
them came back. That was hard.

HOFFMAN: ​There’s a myth in Silicon Valley, that successful entrepreneurs, like oil prospectors,
ultimately just get lucky. They sink a well in the right field at the right time, and they’ve been
cashing in on that geyser ever since.
And I won’t deny that luck plays a huge role in any highly risky career. But I don’t know of many
entrepreneurs who strike oil on their first try, or their second, or even their twentieth attempt.
You need some reason to keep going. And this is what we normally call grit or persistence.

That persistence, that endurance, that grit, can actually lead you to scale.

To understand a little more about where grit comes from — and what inspires it — we reached
out to Angela Duckworth, a psychology professor whose research cemented the connection
between perseverance and success. Google the word “grit” and the second result is her TED
talk. She says that grit actually begins with goals.

ANGELA DUCKWORTH:​​ Human beings have goals. You want to have lunch today.
You want to call this person back.

The reason why I'm trying to do these things is trying to reach these other goals that are
actually of more enduring importance to me. "Oh, well, the reason I have to call that
person back is actually that relationship matters to me.” Why does that relationship
matter to you? You keep asking this question of why until you get to the top level goal,
that gives meaning and purpose to everything else that you do.

HOFFMAN: ​Whatever’s at the top of that hierarchy makes everything else fall into perspective.
And that’s what keeps someone like Ev — or me — in pursuit of that one idea. You keep going
because every single thing you do is in service of your vision.

DUCKWORTH: ​When you're a truly gritty person, you have tremendous clarity about
what that top level goal is, that life philosophy that drives everything else, and you
actually are very good at aligning your day-to-day actions, your to-do list task list to that
top level goal. You don't waste time doing things that are unrelated to the top level goal,
and you're really stubborn. When you're trying to reach that top level goal, and one of
your low level tactics isn't working out, you get up again, and you think of some other
way that you can get the job done.

HOFFMAN: ​Ev found ways to get the job done. For two years — after his funding ran out and
the rest of his team left — he kept developing this new service, Blogger. Most other
entrepreneurs would have packed it in. And I’d argue that this is why many entrepreneurs fail.

Ev stuck with it. He stuck with it because he had a vision that focused on a bigger problem. And
this is the hallmark of an entrepreneur — or an artist, or a scientist, or an activist, or anyone
really — whose first idea can span their entire career.

You just tell yourself, “I know this problem needs to be solved, this solution needs to be built, it
needs to happen.”
And after two years of working out of his apartment, without a paycheck, someone came
knocking. Google. You might have heard of them.

Ev sold Blogger to Google in 2003, and went to work inside the mothership. This validated his
single-minded dedication. And he also got a few shares in Google, which would turn out to be
quite valuable.

Then, Blogger was eclipsed by the competition.

WILLIAMS: ​So, I was at Google a little over a year-and-a-half working on Blogger the
whole time—we started to build things that were attempts to make it an aggregation. But
our frustration was really, we’re building this software. It’s the easiest way to start
blogging. And then people would move off Blogger, because there was no network
effect. There was no reason for them to stay there.

That’s when we started on it more, and we built profiles, and we built links between the
profiles.

HOFFMAN: ​He was in a race to build features that were precursors to a social network. But
there was just one problem — Ev never really aspired to build a social network.

Remember, his vision is to connect brains — not to connect friends or foster a sense of
community.​ ​The lifeblood of social media is not just self-expression — it’s communal interaction:
The friend invites, likes, pokes, comments and other notifications that deliver a dopamine hit
and keep you engaged.

The fact is, those features never really engaged Ev.

WILLIAMS​​: We didn’t build comments into Blogger for a long time.

And that actually hurt us as because for some people like it was all about the comments,
all about hearing from people. I was like, “Eh, I don't really want to hear from people. I
just want to puts some thought out there and read other thoughts.”

HOFFMAN: ​So what features did he want to build? Any feature that enabled a deeper
exchange of ideas.

WILLIAMS​​: There was a feature that I was really enamored with called NextBlog,
was meant to do was drive traffic to blogs, obviously. And there was in theory going to
be some intelligence to it, so you could see something related or something that you
followed before we even had the word follow. And but the very first version of it was
 literally some script I wrote where that would go query a database and randomly select a
blog out of the thousand most recently updated blogs, and redirect you to it.

HOFFMAN: ​But the NextBlog feature wasn’t sufficient to fend off the competition. Blogger
eventually slipped under a tidal wave of social media trends. Why maintain a blog, when you’re
already spilling out your life on MySpace, Friendster, and ultimately Facebook?

You may think this was a huge missed opportunity for Ev. He had a nascent community of
users. He had users identifying themselves, sharing confessional posts. It sounded like all of the
ingredients for a primordial social network.

I’d argue Ev’s advantage is that he’s never distracted by the business model in vogue that
season. He stays focused on that first vision, which will rapidly define the arc of his career.

He’s interested in elevating the conversation — in sharing the most insightful posts.
He never could have related to the users who aspire for more followers or watching the number
of “likes” climb on a witty Facebook post. Most of our brains deliver a dopamine hit from this sort
of digital applause. Ev’s brain? I won’t claim to understand how it works — but here’s a clue of
just how little satisfaction he derives from casual socializing online:

WILLIAMS​​: And so that’s not motivated me, not to say I’m completely antisocial, but this
is not how I look to where the most value of online interaction was.

HOFFMAN: ​So it might seem rather ironic that Ev, the champion of deep, meaningful
monologues — should end up scaling the shortest, most reactive form of self-expression in
internet history: Twitter.

How did Ev, of all people, wind up as Twitter’s co-founder and CEO? Unexpectedly. It actually
grew out of a dead end on Ev’s road to scale. Here’s how it happened… After Blogger, Ev was
drawn to a new medium: Podcasting. This was 2005, and the first generations of podcasts had
just emerged. They were taking certain segments of the tech community by storm.

If everyone was so eager to express themselves in writing, Ev figured it would only be a matter
of time before they’d start sharing ideas in audio. He figured: Speaking was even easier than
writing. So the quickest path to share a thought from one brain to another might just be audio.

So, in 2005, he launched a new company, Odeo. He envisioned it as the premiere platform for
podcasting.

And not just podcasting. Switching from writing to speaking, it would be even bigger than
Blogger. It had to be.
 WILLIAMS​​: I thought audio given my experience with blogging I thought, “Oh, well, this
is even easier because talking is easier than writing.”

And it turned out talking maybe easier than writing, but creating listenable podcasts or
listenable audio content is actually much harder than creating readable text.

HOFFMAN: ​As a new podcaster, I can tell you, Ev is absolutely right about that.

WILLIAMS: ​I realized audio was actually a less casual form, if you will, and could be
very powerful, but it’s just much harder to do and not within the bounds of what most
people can sit down and do even if they had great stuff in their head.

HOFFMAN: ​Ev secured $5 million in funding, he built a platform for podcasters to publish their
work and listeners to discover content. It was expensive. It was ambitious. You might even call it
a marketplace. Or not.

WILLIAMS:​​ I don’t know if we called it a marketplace, but we were gonna do discovery

and creation, and you know, this big comprehensive thing. And before we launched
anything, Apple came out with podcasts integrated into iTunes, which kind of blew our
minds, because it was so early.

HOFFMAN: ​When Apple beats you to market, it’s never a good sign. Especially when your
company’s potential audience is Apple’s installed base of iPod owners. Ev wasn’t sure what his
next move would be.

WILLIAMS:​​ So, I went to the team and we did this very deliberate process where I said,
I don’t know if podcasting or Odeo’s our thing. Who’s got ideas? And we did essentially a
hackathon.

HOFFMAN: ​The hackathon has become a tried-and-true method of generating ideas. The
process is simple: You bring together all your employees — traditionally, it would focus on the
technical employees, but smart companies engage everyone. And you challenge them to come
up with an idea they can build in one marathon hacking session. Usually, everyone is trying to
solve for a specific problem. In Ev’s case, they were solving for the company’s future: What
should they do next?

This Odeo hackathon proved unusually fruitful. Historically so. Odeo’s Co-Founder Biz Stone
and web designer Jack Dorsey came up with the winning idea.

WILLIAMS: ​A lot of the ideas were in a similar space because we had been toying
around with messaging, and SMS, as well as audio. One of the ideas was a group
texting type product. But then what became Twitter didn’t have the name Twitter. It was
one of the others that Jack and Biz came up with.
 It just seemed like something. It was simple. It was elegant. It seemed fun.

HOFFMAN: ​This simple, elegant, fun messaging service actually felt oddly familiar to Ev. It
turns out, he had sent tweet-like messages in the past, back in his Blogger days.

WILLIAMS​​: I built a blog for status updates, and it was completely private. I shared it
with my team. And I went on this short trip for family purposes. And on the trip, I was
sending what essentially were status updates, which is how we thought of tweets at the
time before we called them tweets.

And before we had even built something, or maybe while the team was building
something, I just built this prototype using existing technology where I sent status
updates to a private blog, and that resonated with me. That felt like something
interesting and unique. It was sharing this thing that you didn’t normally share

HOFFMAN: ​Of course, the buzz around Twitter forced Ev to answer a tough question.

WILLIAMS​​: Do we need to actually pivot? Every board meeting, I would present them
Twitter and what was going on with Odeo. Odeo was—even though it was going
sideways, it had users. I remember realizing at the time that sometimes it’s better to fail
than it is to not fail if you’re not gonna, you know, succeed. And Odeo —it had, you
know, usage. We couldn’t ignore it. It wasn’t a total failure. And so, we kept iterating on
that and thinking, well, maybe there’s something here.

HOFFMAN: ​In April of 2007, Twitter spun off from Odeo. Odeo was gradually wound down, and
once more Ev was on the cusp of changing the way we communicate online.

Twitter may sound like a departure from Ev’s goal of connecting the world’s brains. On the
contrary, Ev argues, that vision shaped Twitter from its inception. He saw Twitter as one way of
getting people to share their thoughts at unprecedented speeds.

To him, it sparked the world’s first collective brainstorm.

WILLIAMS​​: I have a thought and now not only is it online but it could be in other
people’s brains in seconds instead of somewhere within the next week if someone
happens to find my blog or reads the RSS feed. It’s very visceral. And the one example
we always referred to is early on and there’d be an earthquake in San Francisco and
you’d turn to Twitter. And at times we even experienced a phone buzzing with tweets
about the earthquake while still feeling the earthquake.
 And so that idea of feeling, being connected in real-time, is really the real-time that made
all the difference as well as the idea that you are really broadcasting, not publishing. So I
think it was just more a pure expression of brains being connected.

HOFFMAN: ​For the first few years after Twitter’s founding, Ev was adamant that Twitter would
never become a venue for kibitzing, like Facebook. Twitter was a forum for broadcasting, for
speaking out loud to the wider world — not just your social network.

WILLIAMS​​: This came up a lot, of course, when we were doing Twitter, which many
people classify as a social network. And I kind of railed against that especially early on
when we’re still trying to figure out what all these things were, and Facebook was fairly
well-established. Twitter is not a social network. I argued, I argued Twitter is an
information network or real-time information network. Social information was a subset of
what Twitter provided, and actually it wasn’t the point, some of the people you want to
hear from are social connections, but there’s a whole world of other people.

HOFFMAN: ​This vision of Twitter as a public forum deeply influenced every facet of its design.
The word “follow,” for instance, reminded users that Twitter wasn’t just a place to tell your
friends were thinking. Strangers could follow your thoughts as well.

WILLIAMS:​​ There was a talk I gave a year or two into Twitter, where I talked about how
at first, we thought the big thing about Twitter as compared to blogging was that it was
short, which enabled real time-ness. It enabled mobile-friendly. It was built through SMS.
But we invented this follow button, and I think we invented the follow term. In fact, I
remember that we had debates about follow. Is it creepy to say you follow someone?
And—

HOFFMAN:​​ You didn’t prefer I stalk someone, or?

WILLIAMS:​​ Well, yeah. We thought about that. We had lots of jokes about that.

That’s why although the very first version of Twitter had a concept of “friend”, eventually
it was like, no, it’s not “friend”, it’s not two-way, they don’t have to approve you. It’s a
follow, subscribe model. And even things like retweets, the design of those got
influenced by this idea that it’s about the dissemination of information more than it is
connecting with your friends or having social interactions.

And what is interesting is that framing at the time was also, well, Facebook was very
much focused on the social. And, of course, all these things expand to do the adjacent
thing as well.

HOFFMAN: ​Notice how Ev’s thinking has evolved since the Blogger days. Remember his
original reaction to the idea of user comments on blog posts?
 WILLIAMS​​: Eh, I don't really want to hear from people. I just want to put some thoughts
out there and read other thoughts.

HOFFMAN: ​He has a newfound appreciation of the value of user comments. And you can
actually spend a whole career discovering how odd little behaviors that emerge online can
redefine the network you thought you knew.

A network isn’t simply a web of users. It’s a launching pad for more robust communication,
deeper trust, and greater understanding. New behaviors emerge as they grow accustomed to
one another in this unfamiliar new venue. And that’s when the true value of the network first
comes into view.

For example, in the early days, when I said, "LinkedIn can help you search for a job." Most
people would then say, "Oh, so you can browse the classified ads." And I’d say, “No, no, no:
“You can look for a company. You can actually look for a hiring manager. You can look at the
profiles of other people who work at that company. And a company can search for job
candidates like you. And then ask you, 'Who else do you know?'”

And why stop at job searches? LinkedIn could also answer questions like: “How do I stay up to
date on information on my industry? How do I learn the right skills? How do I find the right
people to do business with? How do I connect to them?" All of that becomes applications on top
of this network, which then, in turn, feed back into the network.

It’s exceedingly hard to imagine all of those emergent properties as a first-time founder.

In fact, if there’s one thing Ev wishes he could tell his younger self, it’s about this emergent
power of the network.

WILLIAMS​​: It’s about the network. The value is in the network, the value is not in the
software that the Internet enables, the value is in the network, because there are so
many implications of that.

I’m obviously preaching to the choir and talking to the king of networks, but I didn’t
realize that, certainly in the Blogger days.

HOFFMAN: ​As flattering as it is to be called the king of networks — I’m going to have to refuse
that crown. To be clear, I understand the dynamics of networks. I understand how quickly they
can change and how rapidly new opportunities can come into view. But I would argue that
networks are such strange, fast evolving organisms — no one could claim any and all networks
as their personal, royal dominion.
In fact, I would argue that Ev has developed an expertise over a specific kind of network — a
network that enables the discovery, and distribution, and transmission of information.

And he’s become a master of building the platforms for those kinds of conversations. And this is
a skill uniquely suited to Ev, after a lifetime of trying again and again to build this network.

Of course, that’s not the only lesson Ev had to learn as CEO. As the company grew
exponentially, Ev found himself — as so many founders do — in uncharted territory.

WILLIAMS​​: It was an incredible two years that I was CEO. The company in general
grew 10x across every measure that we were counting, including ones that maybe we
shouldn’t have been. But I was definitely in over my head. It was by far the biggest thing
I’d done. The company grew from 30 people to 300 people during that time. I grew an
exec team from nothing. And I never considered myself a great manager, and I think I
didn’t spend enough time thinking about the people and the pressures that they were
under.

HOFFMAN: ​Ev had started the company to build a product — the great connected brain. But he
soon realized that he also needed to grow a team. And the skills that make someone a brilliant
and visionary product developer — someone intensely focused on vision — aren’t always
married with the skills to manage the team to get there.

WILLIAMS:​​ ​I underinvested in relationships, I underinvested in the time to really

understand what was going on with people around me. And that’s what caused the
turmoil. And it the classic lesson of communicate, talk, listen to people. I was obsessed
with the product and the strategy and where we were going next, and capturing the
opportunity we had. And less on the team. And we had raised a lot of money, and the
company was growing, so I assumed the board was happy, and they weren’t telling me
otherwise, so I didn’t invest in that either. And that got me into trouble.

HOFFMAN: ​With some turmoil unfolding between his executive team and his board, Ev took a
step back. Dick Costolo became CEO of Twitter, allowing Ev to focus on product. And the
leadership lesson Ev took from this period of time will serve any founder well. The top line: Ask
for feedback.

WILLIAMS:​​ ​If you’re not getting feedback, there’s probably some negative feedback that
you could be getting. That probably would have helped me a lot. I wasn’t getting any, so
I assumed everything was great.

HOFFMAN: ​By 2010, Twitter was a huge success — but Ev saw it only as a half-step toward his
vision of a robust virtual meeting of the minds. If the internet is one big machine of connected
minds, Twitter helped get all of the synapses firing willy nilly — which was an extraordinary
accomplishment— but that’s not a thinking machine. It’s more of a twitchy, gut-reaction
machine.

There was another part of this thinking machine that hadn’t been built yet — you might call it the
“cerebral cortex:” a place for deep thinking, a place where users could spend a little bit more
time polishing and expanding their thoughts before wheeling them out for the public.

Nice idea, but Ev was the founder of Twitter. That ain’t the platform for polish. Never will be. And
this meant that Twitter became Ev’s gilded cage. A huge, irresistible opportunity for scale, and a
stunning success — but it didn’t feel like he’d reached his ultimate vision.

This can happen to anyone in the business of creating something new: You put your blinders
down and speed down one path, and suddenly you realize you’re miles away from where you
were trying to go. And at that point, it’s hard to double back and find where you went off-course.
Especially when the company is highly successful, and has its own natural path — and doesn’t
reach the destination of the founder’s vision.

Ev was torn. He took a year to retrace his steps - and not only retrace them, but figure out
where he was trying to get in the first place.

WILLIAMS:​​ ​There is about a year after I left Twitter and before we started Medium. And
my next thought was whether or not I wanted to pursue that opportunity.

And I thought, if I believe in this, this principle that you should actually focus on what you
naturally focus on, and really it coming down to impact.

HOFFMAN: ​So many people would have been delighted to found a company like Twitter and
scale it for the rest of their working lives. But Ev couldn’t stop thinking about his larger vision.

This idea of the thinking machine is like his creative center of gravity. And no amount of success
can pull him away from that vision for long. He keeps returning to it.

It’s as if he had said in the middle of Twitter’s fabulous growth, “Who cares about that tower of
Babel? Metrics like monthly active users are not my measure of success. I care about what
they’re saying, and who’s listening.”

Ev wanted to elevate the conversation. Not just make it louder.

Turns out, this part of the thinking machine had been utterly neglected by every founder of
social media. And by publications that historically generated that thought-provoking, insightful
content that Ev was after. Ev thought that those publications were making a serious mistake by
trying to manage their websites themselves. Their efforts resulted in a critical failure of
innovation: their content didn’t have the potential to go viral, or be retweeted, or get applauded.
 WILLIAMS: ​We’re just talking non-social media, that was still published on individual,
isolated websites, often with outdated and cumbersome CMS software.

That certainly didn’t find its audience efficiently. It didn’t have built-in feedback loops and
mechanisms. So, if you’re publishing on the Internet in a few years, it’s gonna make less
and less sense to do that on a standalone isolated website that you build from scratch
and then try to get people to come to. And even if you get them to come there, they’re
not logged in, and any sort of engagement is hard to garner. If you could instead publish
into a platform and build an audience, that’s gonna be more efficient and more likely to
succeed.

HOFFMAN: ​Think about the arsenal of learnings Ev has acquired by now. He’s launched
Blogger — one of the first venues for freeform publishing. He took his lumps at Odeo — and
learned how hard it was to populate a platform with meaningful content. He helped Twitter grow
from a company side project to a global powerhouse of a network.

It’s like with each company, he’s seen a different part of the promised land — but hasn’t put
them all together until now, with Medium.

WILLIAMS: ​That was the opportunity. And because it hadn’t happened yet, there was no
place that really owned that for a particular type of content. Creating a place where
substantive, thoughtful, high quality ideas and stories would reside and find a good
audience.

HOFFMAN: ​That place? Medium. And Ev might have finally found his place, too.

WILLIAMS: ​We’re five years into Medium now, which is actually longer than I had
worked on anything.

HOFFMAN: ​I can relate to Ev’s trajectory, at least a little bit. I’ve been trying to move closer and
closer to one vision for most of my entrepreneurial history.

In fact, my very first startup was an online dating site called Social Net. But no one ever
introduces me as the founder of Social Net, because no one remembers it as vividly as I do. It
means something really different to me than it does to anyone else. It was my first ride on the
larger wave of social networking. I may have wiped out - but it was an invaluable wipeout.

Because after that - when I was investing in Facebook, and founding LinkedIn - I knew a lot
more about how people connect online. I was better equipped to get a little bit closer to my
vision.
Someone like Ev isn’t necessarily asking, “What’s the next big thing?” They’re really asking,
“How do I realize my vision? How do I take one more step toward THAT future?”

In Ev’s case, Medium is working toward being an answer to that question.

WILLIAMS: ​When we started Medium five years ago, I told friends who were in the tech
business that I was gonna create a place to publish on the web. And they were
like—kind of scratched their heads and like, “Mm, isn’t that already a solved problem?”
“Well, actually, you know, we think we can create a better solution for that.”

In the marketplace for stories and written content and ideas, you can slave away, and
maybe you can garner an audience after a few years, but then if you’re lucky, you’ll get a
job.

Or if you’re lucky, you’ll get a book deal. And so—and there’s really nothing in between.
And so, I think what we really haven’t democratized yet when it comes to the Internet is
the ability to compete at a professional level in this form. And we don’t yet know what
comes of that because it hasn’t existed yet. But that’s what I’m most excited about.

HOFFMAN: ​Even Ev doesn’t know what’ll come out of Medium. Just like he didn’t know where
Blogger would take him, or what the future of podcasts would be, or the new kinds of
interactions that Twitter would create. You never know just how far your first idea can take you.
It might take Ev away from Medium, onto another part of that giant thinking machine he wants to
build. It may lead him to company number four, or five, or six. We don’t know what it is yet, and
maybe Ev doesn’t yet either. He just knows what he’s working towards.

I’m Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Howard Schultz

NARRATOR​​: From Silicon Valley, where no game show has ever been born, welcome
to the Liars Club. This is the Masters of Scale edition of the 1976 game show. And now
the host of the Liars Club, Reid Hoffman!

REID HOFFMAN: ​Welcome everyone. Thank you, thank you. The rules of The Liar’s Club
haven’t changed from the 70s, but if you’re not watching the reruns on YouTube, let me refresh
your memory.

We have three esteemed, panelists, and each of them will tell us a story. But only one will be
telling the truth. You have to guess which. And that’s the game.

Our panelists all come from podcasts we really admire. From Business Wars, which chronicles
epic company rivalries, meet David Brown. From Death Sex and Money, the show that talks
about the things people don't talk about, it’s great to have you Anna Sale. From The Thread,
which explores history's interlocking lives and events, may I introduce the one and only Sean
Braswell.

HOFFMAN: ​So, listeners, listen closely. Only one of the following panelists is telling a true story
of an American company’s expansion into China. The other two are artfully lying.
If you guess correctly, tweet us at @mastersofscale when you hear this sound below, and you
might just win the “bonus prize”. What’s the bonus prize?

NARRATOR​​: It’s Aunt Ida’s complete hostess serving selection in artificial silver plate.
Featuring a coffee service, punch bowl set, champagne cooler, and a large serving tray
with matching chip and dip tray. All furnished by the Aunt Ida manufacturing company.
Now, back to you Reid!

HOFFMAN:​​ We’ll start with Panelist Number One, David Brown from the new hit podcast
Business Wars.

DAVID BROWN​​: I want to take you back to Groupon, you remember Groupon? I mean,
it’s not doing gangbusters in the US right now but back in 2011, it was a different story.
And the company was thinking, ok, how do you grow, how do you take advantage of the
 size at the moment, the momentum they had. And the answer was kind of obvious: you
look abroad. And the biggest kahuna out there was China.
Groupon moved really fast and the management team wasn’t exactly steeped in Chinese
culture. So, they found a partner fairly early, WeChat. They recommended doing
something called the “digital red pockets” campaign, this is sort of like an online version
of those traditional red envelopes that older Chinese use to give kids money.

So, with this launch, the concept was the first X number of people to sign up, I don’t
remember how many, they get an extra 100 Renminbi in their virtual envelope. That’s
about 10 dollars. But the problem was, once they launched this campaign, it got hot so
fast that the WeChat online platform actually crashed.

But once they got it up and running, well, it was hugely successful — even by China
standards. And it’s become sort of an annual event. Each year during the lunar
celebration, this digital red pocket campaign starts all over again. So even though
Groupon’s had to pull back a little bit here in the US, the success story on China is a big
part of why as a company, they’re still doing pretty well. That’s my story, you can take it
to the bank.

HOFFMAN: ​Wow, David. A campaign so big, it brought down WeChat. Let’s go to Panelist
Number Two, Anna Sale from Death Sex and Money.

ANNA SALE​​: I’m going to tell you about Uber’s epic rise in China. The company knew
that China was a great opportunity. The population is obviously the world’s largest. But
perhaps more importantly, China has enormous, sprawling cities, and a very low rate of
personal car ownership. There was just one problem: a giant local competitor had a
pre-existing relationship with the Chinese government.

In fact, they were also integrated into WeChat, the group-messaging service that David
just talked about. This made the competing ride service much easier and cheaper to the
consumer. So, in 2016, Uber decides to launch a competitive social media/messaging
system in an effort to match its competitors advantage. The messaging platform was
called Yóu bó bēi. Uber requires its fleet of 100,000 drivers to exclusively use Yóu bó
bēi. They succeed. But when the Chinese government realized that Uber was competing
with WeChat — a state-owned enterprise — it shut down Yóu bó bēi. Within a year, Uber
threw in the towel and pulled out of China.
HOFFMAN: ​Ouch! It’s hard to go up against the Chinese government and win. Alright, Panelist
Number Three, Sean Braswell of The Thread. What’s the story you’re going to tell?

SEAN BRASWELL​​: It’s the story of Starbucks expansion into China, led by former CEO
and now chairman Howard Schultz. Now Reid, you first of all have to keep in mind that
China is predominantly a tea-drinking society. So, Starbucks really had a steep climb.
They struggled for nearly 10 years, with poor sales and high staff turnover. This was
tough for Starbucks, because they pride themselves on being employee focused.

Their turn-around came when Starbucks recognized the dominant role that Chinese
parents play in their kids’ career choices. Starbucks extended health insurance to every
Chinese employee and their parents. And perhaps more unusually, they started inviting
all employee parents to join them at an annual company meeting. Staff retention
rocketed, and that had a cascading effect on customer retention.

HOFFMAN: ​So, who’s telling the truth? And who’s a liar? Tweet us now @mastersofscale.
You’ve got about 5 seconds.

We’re back to tell you… Sean from The Thread podcast is telling the truth about Starbucks.

But here’s the thing, the others weren’t total lies. Groupon really did take an almost entirely
Western approach to winning over the China market, but the digital red pockets campaign with
WeChat never happened, Groupon shut down their China offices after just nine months.

And Uber? No, they’d didn’t launch a competitive social network to embed their technology in.
Uber just couldn’t compete against its more entrenched competitor and so it sold Uber China to
them in 2016.

Thanks for playing the Liars Club.

HOFFMAN​​: All games aside, Starbucks is succeeding in China. They have 3,200 stores, and a
new store opens there every 15 hours.

A key to their success? Recognizing the pivotal role parents play in guiding their kids’ careers.
When they added health benefits for parents, as well as employees, their retention rate soared.
For a Chinese company, that may be obvious. For Americans, like me, it’s non-intuitive.
Starbucks was able to spot this because they have a philosophy of focusing on employee
loyalty and happiness. Starbucks benefits plan can seem extravagantly generous at first glance.
But it inevitably pays off, as it did in China.

Every successful company scales more than just revenue. It scales your worldview.

And I believe you can scale positive social impact along with your business. But only if you’re as
creative and cash-conscious about doing good as you are about your business itself.

[Theme Music]

HOFFMAN: ​I’m Reid Hoffman, co-founder of LinkedIn, investor at Greylock and your host, and I
believe you can scale positive social impact along with your business. But only if you’re as
creative and cash-conscious about doing good as you are about your business itself.

When your business scales massively, you’re going to touch lives on many different levels. You
impact employees, customers, entire communities… Depending on your business, your choices
can impact their mood, the quality of their interactions, their outlook on their own future. You
have the opportunity to shape the world, for better or for worse.

And these touchy-feely concerns shouldn’t just be side effects of your business — if you’re
strategic about it, they will become the beating heart of your business. It’s not about saying, “I’m
a good person, so my company will do good things.” It’s about asking: “What kind of positive
impact can I have, that will also support my core business?”

So, if you want to scale your impact, you have to be as innovative about this as you are about
your business itself.

And struggling startup founders may think that’s a nice idea for later on... Something they can
think about after they scale but I’d argue that the best scale entrepreneurs think about their
social impact from day one

I wanted to talk to Howard Schultz about this, because he’s navigated these questions while
tackling truly massive challenges of scale. As the founder, former CEO, and now executive
chairman of Starbucks, his job is to ask: How do you scale the intimate experience of a
neighborhood coffee shop across tens of thousands of locations worldwide? How do you keep a
quarter million employees positive, consistent, and loyal? How do you ensure that 100 million
weekly customers — that’s U.S. alone — have delightful experiences?

And perhaps closest to Howard’s heart: How do I change my employees and customers lives for
the better? He’s asked this question throughout his career. And he has a specific way of
thinking about it.

HOWARD SCHULTZ​​: For years, I've sat in our management team weekly meeting,
metaphorically thinking about two empty chairs in every one of those meetings, and I
think about it in terms of one chair is empty but occupied by a customer and the other is
empty and occupied by a Starbucks partner.

HOFFMAN:​​ Howard calls all of his employees “partners,” by the way. So, it might help to
imagine a green aproned barista in that second chair.

SCHULTZ​​: And I'm always asking myself quietly, silently, is this decision going to make
the customer and the partner proud? If the answer is even remotely gray, I know we're
on the wrong side of the debate.

HOFFMAN: ​I want you to notice two things in Howard’s comment. First of all, he’s always willing
to ask: “Are we on the wrong side of this debate?” A necessary ballast for any strong-minded
entrepreneur. And Howard — as you’ve probably already noticed — is strong-minded. But for
our purposes, it’s more important to notice that Howard always gives equal weight to his
customers and his employees — I mean, “Partners.”

SCHULTZ​​: I view them interchangeable. We can't make our partners proud if our
customers are not, and we can't make our customers proud if our partners are not.

HOFFMAN: ​This viewpoint is far from universal today. And it was much less common when
Howard took the reins at Starbucks in the late 1980s. His board members, at the time, didn’t
quite know what to make of him.

SCHULTZ​​: "What do mean? What are you talking about? This isn't working, you're
losing money.”
HOFFMAN: ​Howard and his archetypical friends haven’t always sat easily with the shareholders
– but Howard keeps bringing these two groups together. The origin story of those archetypical
friends goes back to a very real and searing experience from his childhood. He grew up in
public housing in Canarsie, on the eastern shore of Brooklyn.

SCHULTZ​​: My father was a World War II veteran, high school dropout and came back
from the war with yellow fever and unfortunately ended up really not realizing the
aspiration of the American dream he thought he was going to come home to after the
war.

He was a delivery driver picking up and delivering cloth diapers, before the invention of
Pampers. In March of 1960, on a delivery, he fell on a sheet of ice and fractured his
ankle and broke his hip. The injury caused him to get fired, no Workman's
Compensation, obviously no health insurance.

When I was seven years old I literally came home from school, opened the apartment
door and saw my father laid out on a couch with a cast from his hip to his ankle.

Listen, at the age of seven, how could I possibly understand the impact that would have
on me, but it scarred me to watch and witness my parents and my mother just go
through such a hard time.

As I got older, I think I've always been sensitized to people living on the other side of the
tracks, and as Starbucks evolved, I think I was trying to build the kind of company my
father never got a chance to work for. A company that would try and balance profit with
conscience.

HOFFMAN: ​Notice his phrasing here: He wants to balance profit with conscience — as if too
much profit will strain his conscience and vice versa. And there’s some truth to that — but it’s
not the whole truth.

Profit and conscience are neither enemies nor friends — they’re frenemies. You have to be
creative about how you bring the two together.

Howard didn’t put benefits ahead of profits. But he didn’t put profits first either. He started
tackling both problems simultaneously. When we sat down to talk, I asked him how he took his
very first steps.
 HOFFMAN: ​Because of your experience at home with your father, did you say from the
beginning the way that we're going to think about employees as partners? What did the
startup part of that journey look like?

SCHULTZ​​: I have many of these old journals that I kept. I wrote something early on
about the business plan of this new company was going to be to achieve the fragile
balance between profit and conscience, and then underneath that I started thinking
about what does that really mean?

What's important to understand is we had no money to build a traditional marketing, or

advertising, or PR, we had none of that and so we defined the brand by the experience
in our stores. And we said early on that the equity of the brand would be defined by the
managers and leaders of the company exceeding the expectations of our people, so that
they could exceed the expectations of the customer. And because coffee is so personal
and it's frequent, we had an opportunity to create an intimacy with the customer that built
the equity of the brand.

HOFFMAN: ​Notice the way Howard turns a constraint into an advantage. He doesn’t brood over
his non-existent marketing budget. He turns it into an asset. In fact, it becomes the justification
for investing in his team, which is what he wanted to do in the first place. As a small,
under-funded company, it would be easy — and typical — to just say: “I’ll take care of my
people later.” It’s more innovative to say, “I’ll find a way to take care of them now, by making
sure that it makes my business stronger.”

A little back story might be useful here. I called Howard the Founder of Starbucks, but this isn’t
technically true. Howard joined a company called Starbucks in 1982. At that point, it was a small
coffee roasting company with several stores. They didn’t serve cups of coffee, much less venti,
no-whip, double-pump hazelnut lattes. Howard started as director of retail operations and
marketing.

At that time, the idea of innovative coffee sounded like an oxymoron. On par with saying,
“innovative shrimp” or “innovative pork ears.”

That is, until Howard attended a trade show in Milan and a whole world of innovations unfurled
before his eyes and underneath his nose.
It was 1983, four years before Howard would become CEO of Starbucks. And this trip is now
part of company lore.

SCHULTZ​​: I went to Milan, to this trade show, I would walk to the fair and as I was
walking I became enamored with the fact that on every street there was two or three
coffee bars. What I witnessed was the romance, the theater and, to use your word, the
joy of espresso.

I would go back to these coffee bars every day I was in Italy and I began to witness
something: I would see the same people who were doing this routinely. They didn't know
each other, but there was a camaraderie between them because there was a sense of
place, a sense of community and there was human connection over coffee.

HOFFMAN: ​Howard soon recommended to the owners that they open a cafe — to cultivate this
human connection over coffee. They weren’t interested at first. But he persuaded them to test
the waters with a single cafe. Five years later, he had the chance to fully realize his vision. The
company had expanded to acquire Peet’s Coffee, based in Berkeley, California. They were
over-extended, and the owners decided to sell Starbucks.

SCHULTZ​​: The founder came to me and said, "We're not going to be able to keep both
companies. I want to sell Starbucks, and you're the natural person that I would trust to
buy it," and I said, "That's fantastic news, but I have no money."

So, he said, "I'm going to make it very easy." It’s $3.8 million to buy six stores and an old
roasting facility. Now, $3.8 million to me in 1987 was like a billion dollars ... I didn't have
it. I had nothing.

HOFMANN: ​Howard, as you might have guessed, figured it out. He raised the money. And in
1987, he acquired Starbucks for $3.8 million. By the end of that year, he had 11 stores, 100
employees and a dream of creating a national brand to bring specialty coffee — and coffee
culture — to the country. So, what does he do next? He starts planning a benefits package for
those 100 employees. For Howard’s private investors, it would be the first of many befuddling
encounters.

SCHULTZ​​: You can imagine this conversation, we were small, losing money, and not yet
proven the model, and I said, "I want to provide health insurance and equity in the form
of stock options for every person who works for the company."
HOFFMAN​​: Yeah.

SCHULTZ​​: They said, "What do you mean by that?"

HOFFMAN​​: Yup.

SCHULTZ​​: I said, "Well, it's pretty clear what I mean. I want to invest in our people and I
think I will be able to prove that we will lower attrition, raise performance, but most
importantly create the kind of company in which people feel part of something larger than
themselves.”

So, 25 years before the Affordable Care Act, Starbucks became the first company in
America to provide comprehensive health insurance to everyone, including part-time
people, working 20 hours or more. And we figured out a way to provide equity in the form
of stock options to every single employee, again, even part-timers.

HOFFMAN​​: Notice how Howard spoke the language of business. He didn’t say “I want to invest
in our people because it’s the right thing to do” or “I want to invest in our people because no one
invested in my father.”

And this is the first thing you need to understand. To promote social good as a founder, you
have to think creatively about how it will help your business. You have to frame benefits and
social impact as a means to an end. And you may have to do it in a way that no one has ever
thought of before. The social good may be touchy-feely, but the business results should be
undeniable. If you require yourself to adhere to that level of discipline, your impact can scale.

This approach has worked for many entrepreneurs with a mind toward social change. I can think
of another good example with my friend Leila Janah. She’s the founder and CEO of two
companies — Samasource and LXMI. Lakshmi is spelled L-X-M-I by the way. Leila founded
both companies to bring jobs to parts of the world mired in poverty, due to lack of opportunity.
But she wasn’t thinking only of that mission. She believed that if she got creative, she could
draw a direct line between the good she wanted to do, and the profits her company would need
to make.

With LXMI, a beauty product company, it all started with butter.

 LEILA JANAH: ​Most of the shea butter in the US and European supply comes from
West Africa. And this was a particularly unusual variety of shea called nilotica, that only
grows wild at the source of the Nile River in Northern Uganda, South Sudan, and
Ethiopia. So, I come across this in a local market. Of course, I start using it myself,
started using it for about a year. And I kept thinking to myself, "This is such an amazing
product." I'd always go and restock at these markets in Northern Uganda, and I thought,
"How come no one has created a brand around this stuff?"

HOFFMAN​​: So, Leila had spotted the business opportunity. And then she thought: this can be
something more. This can help people... AND be a profitable business. And the fact that it helps
people can actually make it more appealing and more profitable. The two can work in harmony.

JANAH: ​The way this nilotica is produced is that women from these communities hand
pick these nuts, select them, grade them and cold-press them. And the women who do
this are literally all war widows—they lost their partners in this really horrific war. So, the
number-one way we can help them is by buying stuff from them. And here's this beautiful
product that could be branded as a luxury product and command the same margins as
an Estee Lauder or L’Oréal fancy skin cream—but a skin cream that actually not only
makes you more beautiful but makes the world more beautiful.

HOFFMAN: ​Leila caught onto another truth about human behavior: certain consumers are
willing to pay a premium for products that come with social impact; it creates a justification for an
indulgence they want to make on themselves. And that premium they pay can be passed on to
people who need it most, if you get creative about connecting the dots. Leila got creative.

JANAH​​: There's such an opportunity, I think, in luxury, where people are trying to
demonstrate that they have the capital to purchase a luxury item, and to almost sneakily
do good through that business model.

HOFFMAN: ​Howard, as we’ve seen, is a master at “sneakily doing good through a business
model.” He honed his abilities through years of tough conversations with Starbucks investors.
As Howard connected the dots between employee good vibes and shareholder returns, his
investors might be forgiven for questioning his logic. But this gets back to Howard’s hypothesis.
He just didn’t see his business the same way other people did. Starbucks, it turns out, was not
selling coffee. It was a social experiment.

SCHULTZ​​: A long time ago someone said at Starbucks, we're not in the coffee business
serving people, we're in the people business serving coffee. Well, we really believe that.
When we go off course and make mistakes, it's because we lose focus and attention on
 the fact that we are in the people business, and the innovation has come as a result of
putting that front and center.

HOFFMAN: ​So, innovation, to Howard, doesn’t just mean the latest frappuccino flavor. It means
new programs for employees that make them happier, more engaged, and more loyal. You
might start with health insurance, or equity. You might add free meals or an office ping pong
table. But if you want to remain competitive over time, you have to stay attuned to deep
foundational employee needs as they evolve. ​Especially a ​ s they evolve.

In Starbucks' case, they’re very attuned to the fact that their staff, as a whole, is young. When
you’re young and ambitious, the first thing on your mind is a college diploma. But college is
staggeringly expensive — and out of reach for the average Starbucks employee earning a
barista’s salary. Identifying this worry led to an idea.

SCHULTZ​​: Can we provide free college tuition for every one of our employees in the
United States and we started looking at the cost of it, there was great trepidation and
concern that we could not afford to do that.

HOFFMAN: ​Free college tuition. For every employee. It was a wild idea. One that would strike
the most idealistic of listeners as deeply impractical. But to Howard, it made perfect sense.

SCHULTZ​​: The country is $22, $23 trillion in debt, it doesn't have the financial capability
to do the things that we would aspire America to do and so the responsibility falls on its
citizens, and in this case, our companies, it's in our interest to provide more for the
communities we serve and the people we employ. One, because the government is not
capable and is not doing it, and two, I'd selfishly say, it's good business and it's good
business because it attracts and retains great people.

HOFFMAN: ​He just had to figure out how to make it pay for itself.

SCHULTZ: ​And then the question, like anything else, is when you got a group of smart
people in a room and you leave your ego outside, you say, "We're not going to leave the
room until we solve the problem," and the problem is how do we make this cost neutral?
And we figured out a way.

HOFFMAN: ​In 2014, Starbucks introduced a first-of-its-kind partnership with Arizona State
University to cover, in full, college tuition for every American Starbucks employee working 20 or
more hours a week. Note that once again, they approached it as a business. They didn’t say
"Education is priceless so any cost is okay." Instead it was "No, no, no. Figure out how to get
the best value.”

Starbucks and ASU split the tuitions costs 60-40. The degrees were exclusively offered online,
allowing employees to stay in their jobs and ASU to keep their cost structure contained. At this
point in Starbucks’ trajectory, there’s no doubt that the company has a massive, ubiquitous
presence — not just in storefronts on streets, but in the national consciousness. That meant one
thing to Howard: an opportunity.

SCHULTZ​​: The role and responsibility of a public company today, especially given the
political environment that we are in right now, is the rules of engagement have
dramatically changed, and they were even changing before this current administration.

HOFFMAN: ​As Howard began thinking more broadly about Starbucks’ opportunity, he started
thinking of the stores differently. Their employees and customers had 100 million interactions
each week. He started to think: What can we accomplish in those conversations? Starbucks is
such a visible company they could start a national conversation with just a few words.

Or, in one memorable case, two words.

In 2015, the company initiated a national campaign to get its employees and its customers
talking about race relations in the United States. You might remember it, it was called “Race
Together.” It mostly took the form of baristas writing those two words on customers’ cups,
inviting them to engage in a candid conversation about race and tolerance.

The intention was to build empathy. Racially-charged tragedies were unfolding across the
country. The way Howard saw it, Starbucks had a civic responsibility to help people talk about it.

Things didn’t exactly go according to plan.

SCHULTZ​​: Within two hours of launching race together, it was hijacked by social media
and we lost the narrative, and we lost it very fast.
HOFFMAN: ​Critics called the campaign insensitive and tone-deaf. Some worried that the
baristas who wrote those words to their customers could face hostile backlash. Others thought
the whole thing felt like a marketing ploy.

SCHULTZ​​: It was the first time where we experienced anonymous haters, all we were
trying to do as a company was raise the level of empathy and compassion towards one
another, make our customers and our people proud, that we want to stand up for justice,
and that's all we're trying to do. But once we lost the narrative there were other issues at
play, including partner safety and misinterpretation by the media of what we were trying
to do.

HOFFMAN:​​ In short, “Race together” was not well received.

SCHULTZ: ​We had to close it down.

HOFFMAN: ​But Howard doesn’t regret it at all.

SCHULTZ​​: Of all the things we've done over the many years, we didn't execute that
properly. We learned something about the cause and the effect of social media and what
could happen. We don't have moral authority, but we had moral courage. We discussed
this at the board level, at the management team level, and I'm so proud that all of us
locked arms, faced in the same direction and said, "Yes, it is very different for a
corporation of any size to talk about race, but if we don't do it, who will?" As I look back
on it, we're proud that we tried to do something that was good and just and had a level of
empathy and compassion associated with it.

HOFFMAN​​: If you were to have a phone line to your younger self, what would you have
told yourself to do differently?

SCHULTZ​​: I think we needed the help and the support of influences on both sides of the
debate to understand that we were not taking a position, we were simply offering the
opportunity to have a compassionate level of understanding, that the country is in need
of human kindness.

We put it out there and we assumed people would understand, and I think we would've
benefited from a swath of Americans who could've helped us in support of what we were
 trying to do, because the interesting thing is they came out much later, saying "I'm so
proud of what you've done.”
If you're going to build a great enduring company, not only do you have to take a risk
every now and then, but you gotta be able to jump into the deep end of the pool and say
we're going to figure it out. The entrepreneurial DNA of a company must remain, even
for a company of this level of scale and ubiquity.

HOFFMAN: ​As companies reach the kind of massive scale that Starbucks achieved, they
inevitably face a new set of challenges. Those twin questions: “How do I do good?” and the
“How do I do good business?” become more complicated as your opportunities — and your
responsibilities — grow massive.

How do you keep what Howard calls their “entrepreneurial DNA”? How do you keep a human
focus? How do you prevent customers from becoming “revenue” and employees from becoming
“headcount"?

This tension is at the heart of every great scale company. But Starbucks is perhaps an extreme.

SCHULTZ: ​Starbucks will do, I don't know, between $23 and $25 billion in revenue this
year, but our average sale is $5. So just think about that, we're in the pennies and small
dollar business, so in order to do that much revenue, we're totally dependent on human
behavior.

HOFFMAN: ​Howard is right to marvel at that ratio: An average sale of $5, and a yearly revenue
of $25 billion. That’s a lot of cups of coffee. As an entertaining aside, I have to add that it always
helps to be in the business of selling legitimate drugs. I often tell entrepreneurs, I only invest in
companies that play to one of the seven deadly sins. Coffee may just be the 8th deadly sin, at
least for me.

That aside, Howard is also right that his business completely relies on two sides of a human
interaction: A customer making an order and a Starbucks employee fulfilling that order perfectly.

And this is the perspective Howard brings as he enters new territory. He asks what innovation
he can bring to the market, and what innovation can he bring to the employees. You might
remember from the top of this episode that Starbucks is by every measure succeeding in China.
They have 3200 stores. A new one opens every 15 hours.
But it wasn’t always so.

SCHULTZ​​: We lost money for nine consecutive years in China and during that time, as a
public company, they just said, “this isn't working, you're losing money, it's a tea drinking
society, close it up.”

HOFFMAN: ​The key to their success?​ ​His years of focusing on employee happiness, let him
spot a key opportunity: the pivotal role parents play in guiding their kids’ careers.

SCHULTZ: ​Eighty seven percent of our employees are partners in China then and today
are college graduates. The parents in China, especially given the one child rule, are
deeply involved in the lives and aspirations of their children, and they felt, "I sent my son
or daughter to college and they're working in serving coffee as opposed to working for
Apple, or Google, or Alibaba, or Tencent. Why are they working at Starbucks? It's not
right."

HOFFMAN: ​The idea that turned it around? It came from a friend.

SCHULTZ​​: I have been friends with Jack Ma for — before Jack was Jack.

HOFFMAN: ​Jack Ma, by the way, is the CEO and founder of the e-commerce giant Alibaba and
the richest person in China.

SCHULTZ​​: And he and I have talked many years about Chinese philosophy and
Chinese values and he asked me to speak a long time ago at a Alibaba function, and
there were a lot of older people there, and I said, "Who are… Are these employees?
Who are they?" He said, "No, they're the parents of some of our employees." I said,
"Really? What are they doing here?" He said, "We invite them," and it stuck with me.

HOFFMAN: ​As Starbucks’ operations in China grew, he started paying attention not just to
employee benefits but parental benefits. They extended health insurance not only to every
employee, but to their parents too. A huge line item for a market that was still finding its feet.
And Howard took it one step further, taking a page out of his friend, Jack's, playbook.

SCHULTZ​​: Given the fact we had this high level of attrition, I said I want to have an
annual meeting of the parents of our employees in China.
HOFFMAN: ​Remember, Starbucks opens a new store in China every 15 hours. When Schultz
says, “let’s meet the parents of our employees in China”— he’s talking about more than a few
symbolic handshakes.

SCHULTZ​​: Now, the people sitting in Seattle, when I said those words, I think they
thought I was crazy: "What do mean? What are you talking about?" And the people in
China said, "We don't know if we do this, should we rent a large auditorium, because a
lot of people are going to come." Or, "Should we rent a small one because we don't want
to be embarrassed?" And I said, "I have a feeling if we do this right, we need a big
room."

HOFFMAN: ​They’ve been filling big rooms for the past six years. In a series of annual meetings,
Starbucks gathers employees and their parents — not for a financial report but a family affair.

SCHULTZ​​: The entire annual meeting of parents and family is a celebration of families
who are working at Starbucks, of us highlighting their children. We fly people, parents, to
Shanghai or Beijing, who have never been on an airplane, they don't have the right
clothes because they might be farmers, and we surprise our partners who don't know the
parents are coming, and it is the most emotional, the most ... It is the thing every year
that I will not miss.

HOFFMAN: ​The appeal of these meetings in China isn’t just the strategic importance. For
Howard, they capture the essence of the company — its humanity.

SCHULTZ​​: When you get this big, the challenge is, how do you get big and stay small?
How do you maintain the intimacy, when you knew all the people and you were hungry
and fighting? These kinds of moments are so emotionally alive with the spirit and culture
and values of the company.
What we've learned through all of this is that we are longing for human connection.
We're longing for a sense of humanity and kindness and compassion and empathy,
people are looking for belonging, especially given what's going on in our own country
right now.

HOFFMAN: ​One hundred percent. You and I both did The Daily Show on that one.

SCHULTZ: ​Without getting too philosophical, there is a sense of loneliness in America,

and I would even go as far as to say that I think we're approaching an epidemic of
 loneliness. Technology has brought us so much, but it also has taken something away,
so the humanity of things becomes so vitally important to what it is we do. If a company
can do that and elevate that, that is our core purpose and reason for being.

HOFFMAN: ​Howard would argue that Starbucks’ success in China has less to do with
innovation in its product or packaging, and more to do with innovation for its people.

SCHULTZ​​: We're seeing it through a different lens, not only in terms of the coffee
innovation and store design, but mostly what can we do from a people perspective?

HOFFMAN: ​What can we do from a people perspective? This is a question that all businesses
could ask themselves more often. We invest so much of our attention in innovating new
products, new platforms and new networks. We offer employees free food and company fitness
rooms, to keep them at work late. We can be strong on maternity and paternity leave, to retain
employees over the long term.

But when it comes to thinking about people broadly, all businesses could stand to learn a lesson
here. When we build something that could take over the world the way Starbucks did, there’s an
opportunity to ask: What do we want to stand for? What impact can we have? How ​can w ​ e
make people’s lives — the whole world, really — better? And how can we do that in a way that
strengthens our business?

Howard thinks it boils down to an idea that any entrepreneur can apply to their business. And I
agree.

SCHULTZ:​​ Starbucks is not profit driven. Starbucks is values driven, and as a result of
those values, we have become very profitable. Not every business decision should be an
economic one.

And this is very important, I think, especially for young people to understand, is that
you're going to make a series of decisions about your business, and if every decision
goes through a very defined lens of how much money can you make as a result of this,
it's not going to add up to much at the end. There has to be balance between the profit
you're searching for and the values that will endure. Starbucks is living proof. And again,
we're not perfect, we make mistakes, but our financial performance is directly linked to
the enduring values and culture that we are constantly trying to enhance and preserve.
HOFFMAN: ​Profits and values. Two old frenemies. Together, again.

I’m Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: John Elkann

ROBERT PASIN: ​One of the first things he made was a little wagon that he used to haul
tools around in the workshop.

REID HOFFMAN: ​That’s Robert Pasin, the CEO of Radio Flyer. He’s talking about his
grandfather, Antonio Pasin, who came from a long line of Italian cabinetmakers. He started
making little red wagons for his workshop in Chicago — mostly just to cart around tools. But
then he noticed: Those wagons were selling better than any of his other products. Like any good
entrepreneur…he pivoted.

PASIN: ​Pretty soon, he was out of the furniture business, and in the wagon business.

And that was really the birth of the iconic little red wagon that we all know and love
today. "For every boy and for every girl.”

HOFFMAN: ​From these metal stamped wagons, Antonio grew a family business that remains a
heavyweight in toys a full century later.

PASIN: ​We had a year-long celebration of the hundredth anniversary. The capstone
event was the big event that we had here in Chicago. We brought the world's largest
wagon down to Michigan Avenue for a birthday celebration.

The world's largest wagon is an exact replica of the original little red wagon, but it's nine
times the size. It weighs 15,000 pounds. The wheels are eight feet in diameter.

HOFFMAN: ​Radio Flyer’s brand is so recognizable that the giant wagon stopped everyone on
Michigan Avenue in their tracks.

PASIN:​​ We had lots of busy commuters going to work who kind of heads down looking
at their phone, and then suddenly they realized they were walking past the world's
largest wagon, and they looked up and smiled, and started laughing, and taking pictures,
and texting it to their family and friends, so it was just a day of lots of smiles.

HOFFMAN: ​The thing is: It wasn’t always all smiles for Robert and his company. In fact, the
very first year that Robert took the reins, he faced a company in crisis.

PASIN: ​The company had been doing well for 70-plus years, but a lot of things were
changing. And we had to change, too, and one of the crisis moments that happened in
my first year was that competitors came out with plastic wagons, and we didn't really see
it coming.
HOFFMAN: ​Plastic wagons are an existential threat when​ your​ company makes wagons from
wood and steel. Those materials were part of Radio Flyer’s heritage and identity. They had
defined the company for decades. But time stops for no one, and it brings with it a never-ending
parade of new threats.

Robert knew that he would have to take a new look at his family’s company — he would have to
distinguish between the essential elements that were truly core to the company’s soul, and the
traditions that were holding them back. And he would have to do this again and again. Because
even the most successful companies face setbacks and stumbles as they inch their way
towards a centennial celebration.

In studying — with humility — these companies that have staying power, I believe this is the
secret to longevity in business. You can scale a business that lasts a century or more -- but you
have to learn to rise and fall and rise again. Forget being a “Unicorn.” And learn to be a
“phoenix.”

[Theme Music]

I’m Reid Hoffman, co-founder of Linkedin, investor at Greylock and your host, and I believe you
can scale a business that lasts a century or more, but you have to learn to rise and fall and rise
again. Forget being a Unicorn. Learn to be a phoenix.

In my world, we talk a lot about “unicorns”— the startups valued at $1 billion or more. But there’s
another measure of exceptional greatness and rarity: A company — let’s call it a “phoenix” —
that lasts 100 year or more. And to be THAT kind of company, you have to plan for the long
term. You have to build resilience. Like a phoenix, you’ll inevitably soar upward, crash, and then
reinvent yourself from your own burning ashes.

To be clear, Phoenix companies don’t actually die. But they do suffer the inevitable slings and
arrows of outrageous fortune. They last because they demonstrate an extraordinary ability to
bounce back.

We don’t talk about this much in Silicon Valley, where I’ve spent my career. We tend to
champion the pioneers, the inventors who build a crazy idea from scratch, and create their own
market as they scale wildly.

You might hear founders say they want to build a brand with impact, a brand that endures. But
most of them say that as they throw themselves off a cliff and try to build an airplane on the way
down. Planning for longevity just isn’t the top priority when the ground is hurtling towards you. In
short, that’s the next game, not the first game. And there are almost no founders in Silicon
Valley who have any relevant experience in the long game.
I would argue Bill Gates is in that game right now, along with Microsoft CEO Satya Nadella.
They’re figuring out how you transition from a founder-led company to the leadership that will
make Microsoft an enduring institution. But the most iconic companies in tech right now —
they’re all still founder-led. Larry Page and Sergey Brin are still leading Google. Jeff Bezos is
still running Amazon. Mark Zuckerberg is still leading Facebook.

We in tech are only just beginning to ask ourselves: “How do you build a business that thrives
for a century or more?”

You have to go outside of Silicon Valley to answer that question. Which is why we started the
episode with Radio Flyer, in Chicago. But to really understand how companies last 100 years or
more, it helps to leave the U.S altogether. So for this episode, I talked at length with John
Elkann. John comes from a long line of Italian industrialists who knew a thing or two about
manufacturing. His great-great-grandfather, Giovanni Agnelli, founded Fiat, the legendary Italian
car company, in 1899. It was initially called a “horseless carriage project.” His grandfather,
Gianni, later scaled the company until it single-handedly accounted for nearly five percent of
Italy’s GDP.

As the fourth-generation leader of an iconic heritage brand, John knows first-hand just how
unlikely it is for a company to survive and thrive for this long. He shares some fascinating
statistics about the rate of failure among companies as a whole.

JOHN ELKANN:​​ First of all, was if you look at the companies in the U.S. from the
1950s, which were listed, it’s really close to 29,000. Of those 29,000 companies, 78
percent today don’t exist anymore. Now, half of those were merged and acquired, but
the other half really just ended their existences. If you look at companies who have
lasted more than 100 years, it’s 45 companies for one million.

And if you look at companies who’ve lasted 200 years, it’s one company out of a billion.
So, the likelihood of survival is really very, very low.

HOFFMAN:​​ It gives you a new perspective on the word “unicorn” right? In tech, that’s what we
call a startup valued at a billion dollars. There are dozens of them now, and I can name lots of
them off the top of my head. But a company that lasts 200-plus years? Now, that’s an almost
mythical creature. Perhaps we should call these companies “phoenixes.”

And to better understand the anomalous phenomenon of this particular century-old company,
you have to follow John’s winding path to the executive suite.

ELKANN: ​My family wanted me to study business, and my grandfather and my uncle,
was an economics professor and had been in the leading business school in Italy, called
Bocconi, and they were very much trying to persuade me. Somehow, I just felt
 engineering was harder, and that I’d rather do something harder and more complicated
and more difficult. I always enjoyed solving problems. I still do enjoy that.

HOFFMAN: ​It’s a good thing John likes solving problems. He was about to be handed one. Fiat
Chairman Gianni Agnelli invited John to sit on Fiat’s board of directors. John was only 21 years
old.

ELKANN:​​ That—that came—that came with a shock.

HOFFMAN: ​John’s grandfather, Gianni Agnelli, was no stranger to dramatic gestures. Esquire
Magazine named him one of the five best dressed men in the history of the world. Jackie
Kennedy reportedly wanted to marry him. He was charismatic, vivacious and the sort of person
who crashes at 120-miles-an-hour into a meat truck in Monte Carlo and lived to tell the tale.

So offering a board seat to his soft-spoken 21-year-old grandson was just another ordinary day
in Gianni’s life. For John, however, it was life-altering. It also felt eerily familiar.

ELKANN:​​ Funnily, that was the same age my grandfather became a director of Fiat,
which was asked by his grandfather, who was the founder of Fiat. And we have the
same age difference. So, they had 56 years of difference, and I had 56 years of
difference with my grandfather. But, it was unexpected and a big shock.

HOFFMAN: ​If anyone had asked me to join a board at age 21, I think I would have been
completely lost. I knew so little about how business worked or how markets worked. I think I
would have been worse than useless. I think I would have been dangerous because I would be
thinking too easily, “Well, I can learn this.”

One of the great things about John is he knew even at an early age to ask aloud, “Oh my God,
how can I learn this?” Which is exactly the right question for a 21-year-old board member to ask.
In fact, it’s the question that ensures knowledge gets transmitted from one generation to the
next for more than a century. John was welcomed into the board on one condition: He couldn’t
conceal his ignorance. His grandfather was insistent: Let it all hang out.

ELKANN:​​ The advice my grandfather gave to me was very clear. No one’s expecting
you to know or understand or contribute. So, the most important thing is for you to listen.
But really, ask questions. And if you don’t understand, that is absolutely normal. And in
parallel to that, he organized for me to start working, spending time in the accounting
department, in the finance department, in the legal department, just to learn the basic
duties of a director. And I got incredible teachers and was very, very fortunate to go
through that apprenticeship.
HOFFMAN: ​So this young apprentice now had a first-rate education in all things accounting. But
he wanted to drill ​even f​ urther down into the company. He wanted to know how everything
actually got made.

ELKANN:​​ I’ve always enjoyed being able to be close to where things happen. And the
experience I had the opportunity to have as an intern in the headlamp factory in the
suburbs of Birmingham was really about understanding how a manufacturing process
worked.

HOFFMAN: ​Forget Fiat’s headquarters. Forget the assembly lines with those big robotic arms.
John wanted to make a headlight — or a “headlamp” as they say in England — for a very
specific reason.

ELKANN:​​ And the reason why it was very compelling is because it was a supplier to
Japanese car manufacturers, which have been leading edge in quality and quality
through how they organize their manufacturing processes. And we were a supplier of
Toyota, which is famous for the Toyota production system. And so, I was able to really
participate in understanding from inputs of materials to the finished product, which was a
headlamp, working to Toyota’s standards.

HOFFMAN: ​Turns out, John was in exactly the right place at the right time to understand
manufacturing at its deepest level — at a cellular level. His apprenticeship culminated in an
insight that was critical to Fiat’s survival. He noticed a persistent gap between what happens on
the factory floor of, say, a headlight plant in Birmingham, and what information filters up to
headquarters.

ELKANN:​​ You are quite far away in a board setting from where the actual life of the
business is happening, and how that information gets distilled, and the way it gets
filtered through an organization.

HOFFMAN: ​So how does information filter through an organization? That depends on the
organization’s size. Startups have it easy. The whole founding team sits in one room together.
They're all talking together. They’re all having dinner together and so forth.

Then you get big enough to create a common infrastructure where newcomers can search for
information from one big data dump that’s passing for a company archive — maybe it’s a
general Slack channel or a shared Microsoft OneDrive.

Then as you get to the next level of scale, you have to start pushing information. So you actually
have to start holding team meetings and broadcasting your decisions from the top and getting
intentional about what you broadcast.
Then you have to go beyond the team meetings, and create a dedicated channel of
communication for each team. You're broadcasting information to select groups of people. In
addition to that, you’re gleaning selected information from them. You’re trying to form a heat
map for the company. And you’re constantly asking yourself: What are the burning questions?
What haven’t I asked?

In short, information doesn't naturally flow to the majority of people, including the people at the
top. The bigger the organization gets, the more vigilantly you have to know how and where the
information flows, and whether you’ve been left out of the loop.

It’s lucky John had a natural curiosity in this sort of information theory of the organization,
because he would soon have to pressure-test Fiat’s entire system of communication on his own.
At age 29, he still considered himself an apprentice. His family, on the other hand, gave him a
sudden and unexpected promotion.

ELKANN:​​ And as I was doing the apprenticeship, sadly, my grandfather started to not
be well. And the business also was in difficulties. So, I quit my job, and in 2002, I came
back to Turin to be close to him, to be close to the business. And he passed away in
2003. And then my great-uncle, his younger brother, who was his successor, passed
away in 2004. And so, the historical family leaders, within a year, passed away. And I
ended up, despite being very young, to be within the family the person closest to the
business.

And so, that’s how I became, at a very young age, responsible for it, which was really a
combination of being the more involved, and also, sadly, because there was really
nobody else.

HOFFMAN: ​I often compare starting a company to jumping off a cliff and assembling the plane
on the way down. And you might think that John, as heir to a multi-billion dollar company, has it
far easier than a startup founder. He gets the plane fully assembled. All he has to do is keep it
at cruising altitude.

But here’s the thing — I know how to build a plane from scratch. I thrive on that adrenaline rush.
I wouldn’t be too thrilled if I was force-marched into the cockpit of an aging 747 and told to fly,
while seeing every warning light flashing red. My instinct would be to grab a parachute, jump
and build a new plane.

John, on the other hand, has no escape plan.

ELKANN:​​ It got very dark. It got very dark.

That first year and a half was terrible. The company was doing badly. It had a lot of debt.
And we were mainly indebted with commercial banks, Italian commercial banks, which
 were worried about the instability that the lack of leadership had. We had changed four
CEOs from 2002 to 2004. And the last CEO, when my great-uncle passed away, wanted
to do a deal with the banks diluting us, and in effect, taking control of the company. So,
the first thing I had to deal with was really to face that.

HOFFMAN: ​How do you face that? First, you need a founding team that’s prepared for evasive
maneuvers.

ELKANN:​​ Luckily, our family was very strongly committed to the business and had no
intentions of being taken out.

HOFFMAN: ​This commitment to the business — to finding a solution and doing whatever it
takes to navigate your way through — That commitment is hard to measure as an
organizational attribute. But it’s essential for any company that wants to go the distance. You
will rise, and you will inevitably fall. Things may get ugly along the way. And if you’re going to
rise again, you need this commitment. And it’s one of the unique advantages of a family-run
company. Success and failure are personal.

It’s both a law of physics and a law of business. What goes up, must eventually come down.
And when you’re in a deep downturn, and you intend to rise again, you’re going to need a
specific kind of person on your side. Nearly every great turnaround story begins with the same
heroic figure: the truth teller.

ELKANN:​​ We were very lucky that Sergio Marchionne, who was running one of the
businesses we owned, agreed to come in and join the company as the CEO. Convincing
Sergio after a very long night that we had, and many grappas, of coming and joining the
company. And that really allowed us to go through a completely new start.

HOFFMAN:​​ Well, how did—how did you know that Sergio—you’re young. You must
have an instinct for these things. But how did you know Sergio was the right guy? And
then, in addition to lots of grappas and a very long night, how did you decide to go into
this battle together?

ELKANN:​​ So, Sergio had run SGS, which is a company we owned, and had been very
successful in turning it around. Prior to that, he had run Alusuisse, which was a
conglomerate that he had turned around. So he had very successful experiences in
turning around complex organizations. Secondly, Sergio was a truth-teller. And for the
amount of problems we had, having someone who was a truth-teller was a breath of
fresh air. His aptitude in being very honest really led to the extraordinary turnaround from
2004 to 2008 that Fiat went through. And I think the grappas helped convincing him,
HOFFMAN:​​ In grappas, veritas. And Sergio almost embodies the archetype running through
every great story of a company turnaround. But this figure isn’t required in turnarounds alone. In
fact, any key executive who's grown a startup to massive scale must be, by nature, a truth teller.

Your organization cannot adapt and cannot survive for long unless you have a truth teller at the
top. Mark Zuckerberg, for example, is a truth teller. That doesn't mean he reveals secrets to the
wider public, but he is a consummate truth teller to the people around him. And that executive
team must also tell the truth to the people around them, and so on, up and down the chain of
command. Hard truths should fly like an electric charge through the organization. And Sergio hit
Fiat like a defibrillator.

ELKANN: ​Sergio has always been someone who likes challenges, and also has a
profound dislike of situations which are not working well.

When things don’t go well in organizations, it’s quite revealing in how people behave.
And what is incredible is the amount of abuse you have. I mean, how much money we
ended up spending in consultants, in investment banks, in lawyers.

Fiat by then was definitely very dysfunctional.

HOFFMAN: ​To root out the dysfunction, Fiat first had to sever its relationships with the banks.
So who would finance the company instead? John convinced his family to reach into their own
pockets — and fund his turnaround plan. It was risky, to be sure. But the family didn’t hesitate to
put their savings on the line.

ELKANN:​​ As a family in 2005, investing a big chunk of money in the company as bank
loans were converted into equity, and to make sure that the company would stabilize.
That’s really when we realized that the company was viable, that it had a great leader.
And we committed putting a big chunk of our money into it.

HOFFMAN: ​Usually hairpin turns like this are delayed by turf wars, fights in the boardroom,
activist shareholders circling in and calling everyone morons. And I had thought if you add
family to the mix — you have a downright combustible situation. On the contrary, John tells me,
family is precisely the reason Fiat was able to make such a daring maneuver.

ELKANN:​​ I think it was very straightforward, Reid, because the older generations
ultimately had the moral authority.

Subsequent to those years, we organize ourselves as a family in what I think is an

effective way, where we have family members who are responsible, and these family
members meet a couple times a year. And then we have a broader family meeting once
a year. And we’ve made sure that communication is very clear.
 And then within the companies, we’ve made sure that we have very good directors. And
that has so far worked very well.

HOFFMAN: ​As John explained how his family came together to back this move, it occured to
me that the presence of these family members, holding moral authority, can be a real strategic
advantage. It can provide you the certainty and believability you need to navigate a perilous
shift, and allow you to rise again.

There’s an interesting corollary in startup culture. You’ll find a widespread preference among
investors in Silicon Valley for any startup that’s founder-led — with the same CEO at the top,
from the first hire onward. And you might mistake this for some vague, almost mystical belief
that the CEO embodies the DNA of the organization. Not quite. In fact, the CEO has a duty to
set a strong culture that scales with the organization. You never want the culture encoded in
only one person’s head.

The real benefit of having the founder stick around is their ability to take a big risk — to say, “We
must take this risk. We must adapt to the future. We can't just preserve what we’ve built.” And
not just say it, but have the whole company believe in it, and rally to their cause.

The willingness to take that risk and the moral authority to drive it, is actually quite hard to
replace once the founder steps down.

And that’s why I find Fiat’s family-run business so fascinating. The family, in a sense, reflects
the authority of the founder down through the generations. They’ve solved what Silicon Valley’s
iconic companies are only now just beginning to figure out — how to create the long-term moral
backbone of an organization that will naturally tend to grow big and complacent with its
traditions. And so the existence of the managing family may be one the keys to becoming a
phoenix.

ELKANN:​​ The fact of having so many enemies unified very, very much the family. And
I’m very grateful to my grandfather’s generation, and my cousins. Everyone was very
supportive and everyone put personal money for the company to be stronger, and really
to make sure that it had the necessary capital to go through this turnaround. So, the
family was an incredible plus​.

HOFFMAN: ​And Fiat, now a family concern, broke free of its financial burdens and began a
process of reinvention.

ELKANN: ​We were working on the launch of the Fiat 500, which was launched in 2007,
which was then the 50​th​ anniversary of when it was first launched. And that was really
the moment where things started to really tick and be positive.

And 2008 was the record-earning year in Fiat’s earning history.

HOFFMAN: ​2008 also happened to be the year of a global financial meltdown — as I pointed
out to John.

HOFFMAN:​​ Out of one frying pan into another.

ELKANN:​​ Exactly. Exactly.

HOFFMAN: ​So 2008, which should have been Fiat’s banner year, instead was the year of Fiat’s
fire sale.

ELKANN:​​ We went through a massive exercise of simplifying. We had too many

companies. We want to be in less companies and we want to be in global businesses
that can compete on a global scale. And the reduction of complexity definitely was of
immense help.

HOFFMAN:​​ You had your own global upbringing. I mean, many countries, many
languages, many cultures. How did you kind of map between which of the global
opportunities, with which of the right businesses of the future to focus on within the
family portfolio?

ELKANN:​​ So, I’ll answer you in two ways. The first one is, the reality is when you need
to sell companies, you generally sell the good ones. And so, there are many businesses
that we had to sell because you’re in no positions of choosing. The ones which we were
left with, we then prioritized on the ones which we had the fair chance of competing on a
global basis.

HOFFMAN: ​If you’re an enthusiastic listener of this show, you may recall our episode with
PayPal co-founder Peter Thiel. He encourages entrepreneurs to escape the competition by
pursuing a wildly original idea. And you really should do that to the extent that you can — but to
be clear, even the most innovative companies must imitate their competitors.

In fact, Silicon Valley companies study their competitors quite intently. How do you build good
server infrastructure? How do you build good data centers? What are you doing in terms of
emerging technologies? Your competitors can give you a clue. So that kind of engagement with
the competition is actually, I think, true for everybody.

Those competitors can spur your own team to take surprising leaps. And it can be disorienting.
To travel forward, you must travel backward in time — and rediscover the traditions that really
constitute the core of your business. John has an interesting term for this experience. He calls it
a return to the essence of what you do.
 ELKANN:​​ I think it’s important to stick to the core and the essence of what the
organization is. Try and listen to a very limited number of people, because everyone
ends up having his opinion. So, as you go back to the essence, you somehow find a lot
of the answers. And I think the truth-telling. Being very candid about the problems, being
very open about the issues. And then building the confidence that it can be over—you
know, you can overcome it. Things get resolved.

So, one of the issues that had occurred was really that global markets opened up. And
so, Fiat, we were really a diversified conglomerate with very strong market positions in
Italy, faced incredible competition from outside. And the big change was really to open
up to competition and not to fear competition, but really to engage with it. And that’s
where Sergio, being a truth-teller, was incredibly important in allowing the conversation
to happen, and having the organization be willing to engage and get the confidence that
it could engage. And I think that’s really the big changer.

HOFFMAN: ​Engaging with the competition will be key to any company that wants to rise again.
You can only ignore the outside world for so long. And as John says, this takes organizational
confidence. You have to believe in your abilities. And importantly, you have to know who you
are. This often takes explicitly returning to the essence of the company.

Radio Flyer is another example of how a legacy company can return to its essence. Remember
Robert Pasin? He’s the third generation CEO of Radio Flyer, another “phoenix” company.
They’ve been making little red wagons for a century.

PASIN:​​ When I came into the business about 25 years ago, the company was kind of at
a crossroads.

We were more of an inwardly focused manufacturer, which had worked great for a long
time, but we missed the fact that consumer taste had changed, and these plastic wagons
started taking away sales from our traditional steel and wood wagons, and so it was
really a moment of beginning to redefine and reinvent the company.

HOFFMAN: ​So there are two ways Robert might have responded to this competitive threat. He
could have raced to catch up with the competition and rush into the plastic red wagon market.
Instead, he asked himself a much deeper question.

PASIN:​​ What are we? Are we a manufacturer? Are we a brand? Are we a design
company?

HOFFMAN: ​Think about that: Seven decades of making little red wagons, and this CEO has to
ask himself, “What are we?”
 PASIN:​​ And what can we be the best in the world at? And ultimately, we decided that
the thing that we had that was the most value was the relationship the consumers have
with Radio Flyer. When we asked people to describe, what does Radio Flyer mean to
them, all of these wonderful images would come up, like, "I was playing outside, the sun
was in my face, the wind was in my hair, I was playing with friends and family that I
loved, I was imagining that I could go anywhere, that my wagon was a race car, or a
spaceship," and so we really focused in on the fact that Radio Flyer is a vehicle of the
imagination, that it can be anything you imagine it to be, and it can take you anywhere
you want to go.

So then we said, "Well let's really focus in on vehicles." And one of the things we found,
when we started asking people to describe the Radio Flyer they had as a kid, they would
often describe a wagon, of course, but they'd, many times, say, "I had a Radio Flyer
tricycle, when I was a kid." And we'd ask them to describe the tricycle, and they'd say,
"Well, the tricycle was shiny, and red, and it had chrome handlebars, and it had a big bell
on it, and it was Radio Flyer." And we said, "Wow, that's crazy, 'cause we never made a
tricycle." So we came out with it.

And people point to it, and say, "I had that Radio Flyer tricycle when I was a kid," and it
quickly became one of our best sellers. And then we leveraged that product into
becoming the number one brand in tricycles.

HOFFMAN: ​Radio Flyer’s sales have quintupled since Robert took the helm. And they’ve gone
on to make everything from little red scooters to little red Teslas, but only after Robert
decoupled the wagon from the deeper idea of their essential design — little, red, shiny vehicles.

PASIN:​​ One of the things that really, my grandpa baked into the DNA of this company,
as a designer and a craftsman, was that anything that we put the Radio Flyer name on
has to be beautiful design, and it has to be really good quality. And I think those are the
enduring values that have caused us to be able to not only survive for 100 years, but to
thrive.

HOFFMAN: ​It’s a story of renewal echoed by Paulette Cole, CEO of ABC Carpet & Home and
ABC Kitchen. Her father opened an iconic carpet store in Manhattan in the 1960s. And when
Paulette decided to join the company 20 years later, she started asking that question, too:
“What are we?”

PAULETTE COLE​​: I mean, literally, the store was a carpet store across the street with
27-inch carpet cut-up samples in all of the windows with dust three inches thick. We
hadn't really quite reached the creativity and design DNA of the world yet. It was really
about getting value, and price, and selection, and quantity, and like Lower East Side kind
of energy merchant, all about value, value, value.
HOFFMAN: ​But Paulette did have a foundation.

COLE:​​ Quality was there.

HOFFMAN: ​And she knew that she could take that foundation of quality and evolve it, over and
over, to align with her values. Paulette left the company for about three years in 2000, and when
she came back, she had a vision.

COLE:​​ That vision was kind of a large progressive step left with the business, where it
felt really, really clear to me that the only way forward is to really plug into that passion of
purpose, and, "Why are we here? How can ABC serve at its highest? What is it that is
deeply, deeply inspiring me? What do I feel called to speak to, and to create, and to be a
catalyst for?"

HOFFMAN: ​And every time she asked herself those questions, Paulette thought of a new way
to heighten the retail experience. ABC Carpet and Home is a standard-bearer in the industry,
known for its unmatched curatorial eye. There are ABC stores in Manhattan, Brooklyn, and
Florida.

COLE:​​ It was a tumultuous journey, and very, very challenging to change what is. I think
always remembering where you came from, and having deep love, reverence, and
respect for what was, but also really pushing forward and appreciating evolution, and
being part of evolution.

HOFFMAN: ​The more you think about this question — ”what are we?” — the more you’ll
question the very foundations of your business. That’s a very hard question to entertain over the
course of decades — and harder still when you’re also trying to grow the business. In fact, very
few companies have managed to both scale tremendously and age gracefully. John has some
sobering statistics to share with today’s fast growing, fast hiring companies. You may be a
unicorn. But unless you succeed in hiring the next generations of managers to ask “What are
we?” — then odds are, you’ll never be a Phoenix.

ELKANN:​​ Now, another interesting fact which I didn’t know is that of the oldest
companies in the world, 90 percent have less than 300 employees. And the oldest
company in the world is a Japanese hotel which was founded in 705, which is still
family-owned in the 52​nd​ generation. And the actual business, this oldest business, is a
winery in Germany, which again, is family-owned, was founded in 862. And funnily
enough, these are very small businesses. So, it’s interesting to think that the businesses
that survived the longest are somehow niche business rather than businesses that grow
very quickly.

So, the more you grow, the more money you make, the more people you have, the more
money you end up making as an organization. But at some point, like metabolisms, they
 end up being weaker as they grow. And by being weaker, they get affected and
disappear quickly.

HOFFMAN: ​I want to pause a moment to acknowledge this focus on the long-term —this
heralding of the “phoenix” — isn’t exactly what my profession is known for.​ ​In truth, the vast
majority of investors today aren’t particularly looking for longevity. They’re looking for instant
gratification for quick returns. My friend Tony Tjan thinks deeply about this.

TONY TJAN:​​ The greatest concern in our capital markets right now, is short term-ism.

HOFFMAN: ​Tony’s the CEO and managing partner at Cue Ball Group, a venture capital firm
based in Boston. And he sees “short term-ism” as a real risk to future Phoenixes.

TJAN:​​ Short term-ism is causing great, great risk to the capital markets, and it is not
allowing great quality to grow. We're in a period of microwave capitalism, and most
things that come out of the microwave don't taste very good.

HOFFMAN: ​I don’t recall anything in Greek mythology about a phoenix rising from the
microwave.

TJAN​​: The structural pressures of how capital funds have been put to work for
compensation, and the culture that we are breeding — especially in many of the
technology-based firms that I love and embrace — that the only way to win is to think
fast, scale fast.

HOFFMAN: ​Tony’s right. How many times have I said “start sprinting” on this show? He has a
great counterpoint to the speed-first mentality we champion in Silicon Valley.

TJAN:​​ We joke that look, while a lot of people are looking for unicorns, we're in search
of sea turtles.

HOFFMAN: ​He says Sea Turtle. I say “Phoenix.” Potato potah-to. The idea is the same. To last,
you need the capacity to rebound and reinvent.

TJAN:​​ Look at the companies that have really, really lasted. They've needed times to
stop, reflect, readjust, and that's what building great, durable businesses and durable
brands has been about.

We have to go back to recognizing that companies and capitalism have a purpose much
more than just capturing value. They are out there to do more than just making profit.
Ironically, even if that was your objective, which was just to make as much money as
possible, the way to do it is to focus on what will create durable cultures. That's the only
long term competitive advantage.
HOFFMAN: ​Unicorn companies tend to be mission-driven. The founder articulates a vision of
the future. The employees rally around that vision, which is translated into a mission statement,
which is printed on posters and drummed into every new hire’s head until it’s borderline
irritating. It’s a powerful, and somewhat predictable process.

But the phoenix companies — the ones that can go the distance — they rise out of and soar
beyond the founder’s vision. And part of the rebirth needs to happen organically across the
business. There have to be enough diverse centers of strength — and enough decentralized
lines of communication between them — to enable a rebirth to come from any direction. And
this is a far more unpredictable process inside a company. John compares it to the evolution of
a city.

ELKANN: ​While cities, as they scale, develop and develop and develop into much
stronger entities. And one of the reasons for this is that cities actually are
multidimensional, which companies tend not to be. And so, as I was thinking about that,
one of the secrets we’ve had is that we, somehow being multidimensional, in the sense
that we’ve been in multiple businesses and multiple geographies. So, probably, one of
the ways of lasting and scaling is by being able to really understand how to be
multidimensional, and to really learn from how cities develop, evolve, and grow.

HOFFMAN: ​Think about it: Radio Flyer went from little red wagons, to little red Teslas and
tricycles, and any vehicle imaginable.

ABC Carpet, went from carpets to home furnishing to a general feeling of hominess. It may
sound like these new CEOs are losing focus. In fact, by rebuilding in new ways from the ashes
of what came before — they’re securing the founder’s legacy.

ELKANN:​​ And you could argue that you have some very strong decentralized
organizations, where they end up being multidimensional, and within each dimension,
they’re focused. And somehow, they’re able to be more innovative and be able to be
less rigid, like somehow cities tend to be, at least the ones that actually scale.

HOFFMAN:​​ Well, the interesting thing about the cities parallel is that on the one hand,
cities are robust. I mean, the oldest organizations tend to be—or society entities tend to
be cities, universities, religions. But one of the things that’s interesting when you think
about that is cities tend to be generally strong and vibrant, but when they get into
trouble, I mean, they get into serious trouble. I mean, Detroit, right? Other kinds of
places, where all of a sudden, the city gets like—if it—if it—if the robustness breaks, then
it’s in real trouble.

ELKANN:​​ Yeah. But what’s interesting about that, So, those cities were very much built
only on one point of strength. But the ones that scale are the ones that are able to
 revitalize themselves, and somehow, that is the multidimensional notion. But if you rely
only on one dimension, and the Detroit example is a good one, then you have one point
of weakness. And you will—at some point, that will lead to trouble.

There’s a good quote from the founder, my great-great-grandfather, which I think is very
telling, which I’ll just read.

Above all, we must always look to the future. Foresee the future of new inventions. Be
unafraid of the new. Delete from our vocabulary the word “impossible.”

And he went through two world wars, Communism, Fascism—and in those incredibly
difficult periods of times, built an incredibly strong business that did a huge amount of
good for the people working in it, and also for the communities in which it operated. And I
think that that really stayed with the family and with the company as we went through
that turmoil.

HOFFMAN: ​I’m Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Kevin Systrom

REID HOFFMAN: ​Florence, Italy. Set among the cypress trees and the olive groves, art,
science and culture flourished here between the 15th and 16th centuries, setting the stage for
the modern world. Today, art lovers flock to the city to see Michelangelo’s David, Brunelleschi's
Duomo, and models of Da Vinci’s Flying Machine, along with hundreds of renaissance
sculptures and frescoes.

It was this artistic pedigree – along with the fantastic Italian espresso – that drew a young Kevin
Systrom to Florence.

KEVIN SYSTROM:​​ I decided my junior year, I wanted to study abroad, and honestly I
didn't like languages, but I picked Italian because I was told it was the easiest to pick up,
but I fell in love with it and I wasn't terrible at it. I got pretty good. And I was like, “Yeah, I
want to go to Italy and I love coffee and art.”

HOFFMAN: ​Kevin was an avid photographer. He went to Florence with lofty intentions of
creating his own art. He came equipped with a very expensive camera.

SYSTROM: ​It was like the exact lens you want to use with the sharpest glass that you
could get.

HOFFMAN: ​Kevin was about to get a lesson that would stay with him forever.

SYSTROM:​​ My professor Charlie looks at me with my camera – which is, I think an

embodiment of my personality of perfection – and he looked at me and he was like, "No,
no, no. Like you're not here to do perfection. Give me that."

So I did and I thought he was going to tweak with the settings and then he went into the
other room came back with a plastic camera. He's like, "You're not allowed to use your
camera for the next three months." And I had like, saved for this thing. So he gives me
this camera and I'm like looking at it, it's like a toy camera.

HOFFMAN: ​Charlie had replaced Kevin’s prized professional rig with a simple, cheap Chinese
camera known as a Holga​.

SYSTROM:​​ If you haven't seen a Holga, it's like a toy camera. It's got a plastic lens and
like, light leaks into the side of it if you're not careful. He's like, "You have to learn to love
imperfection."

HOFFMAN: ​With his new toy in hand, Kevin immersed himself in the art and cafe culture of
Florence. He soon embraced the simplicity of the Holga.
 SYSTROM:​​ I started taking pictures on the go, when I was around Florence and I would
bring it back and he would show me how to develop these photos and they were square,
first of all, but they were like slightly blurry and slightly artistic and then he showed me
how to add chemicals to the development bath so that it could actually tone the black
and white photo with different colors.

So if you're listening to this and, you know, Instagram, you see a connection. Right? Like
square photos and filtering photos.

HOFFMAN: ​That’s right. Kevin Systrom would go on to co-found Instagram, the photo-sharing
app. The app that gave everyone access to the aesthetics – and the appealing simplicity – of
the Holga.

SYSTROM: ​If you go back to my profile and scroll all the way back, I mean, it's blurry, it
looks like they're a light leaks, et cetera, and two and two just came together. I think the
best products are usually built based on personal experience from your past and you
never know exactly what parts of your past will come together to form that puzzle and be
a product that you want to build for the world, but inevitably something from your past
triggers a memory and you say, "You know what, people might just like that."

HOFFMAN: ​People certainly did. Over 1 billion of them. And each day, more people fall under
the fantastic plastic spell conjured by Kevin’s first encounter with that Holga. His early lesson in
the power of simplicity hit the app store – and social media networks – at exactly the right time.

I believe simple ideas can soar to massive scale but only if you steer them to catch the
prevailing winds.

[THEME MUSIC]

HOFFMAN: ​I​’m Reid Hoffman, founder of LinkedIn, investor at Greylock, and your host. And I
believe simple ideas can soar to massive scale, but only if you steer them to catch the prevailing
winds.

Regular listeners of this show know that I often compare the entrepreneur’s journey to jumping
off a cliff and building a plane on the way down. But some founders do something even more
daring. Instead of scrambling to build a jet, they craft the simplest possible glider. They strip out
every part of the plane you would think they'd need to stay airborne — the engine, the
propellers, the wheels – and they coast on the prevailing winds.

A glider is the model of simplicity. And with the right pilot, simplicity means agility: the ability to
swoop enormous distances and soar to great heights, so long as you know precisely when and
where to catch the right updraft.
It’s the same with companies. A simple business idea can soar to scale, if the founder knows
how to read — and ride — the prevailing winds.

I wanted to talk to Kevin Systrom about this because he and his co-founder Mike Krieger
achieved the impossible with Instagram. Not only did they launch a dead-simple app that blew
up the internet but they did it with the smallest, simplest staff imaginable. Only 13 people
worked at Instagram during its first 18 months, when it reached 30 million users. That's
well-more than 2 million customers for each team member.

Let’s face it: This ratio is nearly impossible. And frankly, I don’t recommend it. But
Instagram-style simplicity is worth pursuing. Kevin and Mike were able to massively scale a
simple product with a teeny team because they were masters at drafting off of the prevailing
winds in technology. They also knew exactly where to invest their own resources in order to
create something people loved and wanted to share.

And Kevin has been sharing things he loves for a long time. Before photos, he shared music.
His method was low-tech and perhaps a little on the shady side.

HOFFMAN:​​ Apparently, you were the kid who hung an antenna out of the window of
your dorm room to broadcast a pirate radio station. What's the story with that?

SYSTROM:​​ I can neither confirm nor deny the allegations. But let's say it was true...

HOFFMAN: ​Hypothetically.

SYSTROM:​​ Hypothetically speaking. At my boarding school, I was really into music and
radio and deejaying. I had two turntables and I loved electronic music back when
electronic music was really uncool. And I still remember all the kids looking at me like,
"What are you listening to?" I was really into the idea of broadcasting music and having a
relationship with a community of listeners and this was before internet radio was like
really a thing. Although honestly that probably would have been a better idea.

HOFFMAN: ​Kevin’s musical taste wasn’t exactly a crowd-pleaser. But he felt a need to share
his passion for it.

SYSTROM:​​ So, literally out of my dorm room, I hung this like big steel antenna on the
roof whenever I went live and hooked it up to my turntables and started playing music
that no one liked. It was so fun because I remember like the next day talking to
someone, "They're like oh yeah 89.3, that was great for the one hour you went on."

HOFFMAN: ​His parents told him he needed to get a job. And in their eyes, being a DJ didn't
count. So Kevin did the next best thing. He got a job at a record store in Boston called Boston
Beat. It opened him up to a whole community of people like him, who enjoyed the simple
pleasures of digging through crates to find obscure records. And it brought him a whole new
audience for his deejaying​.

SYSTROM:​​ I also got to go to these clubs and actually sit in the DJ booth watching
people do the thing, but I was like 16 in a 21-plus place and I behaved myself, I promise,
mom and dad, and I did. I was a goody two shoes.

HOFFMAN:​​ And was that DJ experience any of the kind of early glimmers of now
thinking about social networks later? Was there any of that kind of social pattern and that
from the DJ booth?

SYSTROM:​​ I, you know, it's all connected, which is, you know, when I did sports as a kid
I was the goalie; when I played baseball, I was the pitcher. I always wanted to be in the
center of it and not controlling it, but I wanted to be in the center of it and the DJ is kind
of the same thing, right? So, the early glimmers of, I think, wanting to start a company
and lead people in a specific direction, sure like that relates a lot to, whether you're the
goalie the pitcher or the DJ, you're in these types of positions.

HOFFMAN: ​Those glimmers came into focus at Stanford. Kevin studied Management Science
and Engineering. He took that fateful trip to Florence. He also built web apps in his spare time,
including a photo sharing app for his friends. When graduation came around in 2006, he took a
job at Google.

SYSTROM: ​The next two years at Google were so influential for the rest of my life
because I saw people working hard, building products that sometimes worked,
sometimes didn't, but I saw the process of building.

HOFFMAN: ​Kevin soon moved from a team that was building new products to one that was
charged with acquiring them. He loved it. But there was one problem. It was 2008 and the
market tanked after the financial crisis. And Kevin? He got bored.

SYSTROM: ​I was complaining, "Hey, like the market crashed. We're not buying any
companies. What should I do?" And one of my coworkers was like, “You should pick up
golf.” And like un-ironically, just like looked at me and was like, “Learn to love golf." At
that very moment in my head, it was like, "Ding. You're leaving." I was just like, “I'm 25 or
-6 or whatever”, like “I'm too young to go pick up golf.”

HOFFMAN:​​ Kevin fled the fairway for a travel startup called NextStop, founded by some former
Google colleagues. For Kevin, it was the startup life he had yearned for.

SYSTROM:​​ NextStop was so influential because number one, I was a marketing guy
there, like they asked me to join as basically marketing and growth. Like, how could we
 grow the service? I was pretty bad at that actually, like I'm not sure I ever helped grow it.
I tried, I really did.

HOFFMAN: ​That's right, Kevin Systrom, the man who would co-found one of the
fastest-growing tech companies in history, was bad at growth. But NextStop ignited Kevin’s
desire to build something himself. He studied the code that NextStop was based on, and
learned the basics of building a scalable web app. Soon, he was building his own projects
outside of work. He tinkered at night and over weekends. One of these side-projects was a
check-in app he called Burbn. Though he spelled it B-U-R-B-N.

SYSTROM:​​ Remember Mafia Wars?

SIRI: ​Mafia Wars is a hugely popular online game created by Zynga. For more
information, listen to the Masters of Scale episode with Zynga’s founder, Mark Pincus.

SYSTROM:​​ I had this idea that Mafia Wars would be great in the real world. Like instead
of fighting for territory in the digital domain, like imagine like, taking over a pizza parlor
digitally or taking over, you know your favorite bar because you checked in a few times.
You could join families and war against each other and that's why it was called Burbn,
because it was supposed to be like speakeasies 1920s, whatever.

HOFFMAN: ​Burbn was a simple app. Sometimes, simplicity is intentional. Other times, it’s
foisted upon us by limitations: in time, in resources or, in Kevin's case, his own abilities.

SYSTROM:​​ It turns out, like I wasn't good enough to build all of the gaming features. So
it was just a check-in service and I gave it to my friends and they started using it.

HOFFMAN:​​ This was a time when check-in apps were big. VCs were pouring money into things
like Foursquare and Gowalla. If Kevin had persisted in trying to build gaming features for Burbn,
he probably wouldn’t have found a backer. But he had kept it simple. And he got some attention.
One VC made him an offer. But... it came with a condition.

SYSTROM:​​ One of the VCs was like, "Hey, like I'll give you money to do this but you
have to find a co-founder." I was like, "What, like I can do this, like I'm ..." He's like, "No,
no, no, like all companies I fund, you have to have a co-founder."

HOFFMAN: ​I agree with this unnamed VC. In my experience, two co-founders are almost
always better than one. And three co-founders are frequently better than two. We have another
episode planned on this entire topic.

In his search for a co-founder, Kevin crossed paths with Mike Krieger, an old college friend who
brought the engineering heft to balance Kevin’s product development credentials.
 SYSTROM: ​We just hit it off. He's one of the nicest guys I know, super humble but so
sharp. I think we've just had a compatible work relationship for the last eight years, but it
all started then and we took a bet on each other.

HOFFMAN: ​Kevin and Mike clicked instantly. But they struggled to push Burbn beyond 80
users. And most of those 80 users were their friends.

SYSTROM:​​ We worked on Burbn, our friends liked it but no one else like that. And I'm
like, looking back, I'm actually surprised anyone gave us money to work on this idea.

HOFFMAN: ​Growth was stagnant. Kevin and Mike examined their options. They identified the
three most popular features on Burbn and decided to focus on just one. The features were:
checking in at locations; coordinating visits with other users; and uploading photos when you
checked in somewhere. As you’ve probably already guessed: they chose photos.

HOFFMAN:​​ What was the insight to we have to prune everything else away, right? Like
we just have to say, okay, "This is the thing. Everything else goes." Because there's a
natural tendency, say, "Well, but people like this and we're getting some positive user
feedback and you know we put some energy into it so we won't develop it, but we'll leave
it." What was the “it must all go, this is the thing”?

SYSTROM: ​I think it was about trying to have a clear story to tell people when we were
introducing it to them. I like to say, like, products that do too many things that aren't
adjacent, like how do you explain, like if you're going to tell a friend about a cool new
service that does all these things like, how do you explain it to them?

HOFFMAN: ​This is one of the things I love about Kevin's approach to product. He understands
that he needs to excite users. But he also needs them to tell their friends. And if they can't do
that in a single sentence, they’re less likely to do it at all. So Burbn, the check-in app, became
Instagram, the photo app.

Kevin and his co-pilot Mike had jettisoned the dead weight. They had decided on the basic
structure of their glider. And they had identified the first gust that would propel them on their
journey. Now it was time to bank hard to capture that breeze. They did this by creating
Instagram’s killer app: its filters.

Kevin wished could take credit for it. But he says it was actually his wife’s idea. It came to them
during a trip to Mexico.

SYSTROM​​: We rented a little room in a bed and breakfast and I was working on Burbn
at the time and we were pivoting to photos but she was like, "I don't think I'm going to
ever use this app." I was like, "Why not?" She's like, "Well, my photos aren't good." And I
was like, "Well, that's fine. You can post photos. It'll be good." And she goes, "Well,
 they're not as good as your friend Greg's." I was like, "Well, Greg filters all his photos."
And she looks at me and she's like, "Well, you should add filters then." I was like, "Ah,
you're right. I should add filters."

HOFFMAN: ​I hear stories like Kevin and Nicole’s all the time. Entrepreneurs take note: An
honest partner is always your best source of ideas. Kevin was smart enough to listen.

SYSTROM: ​I went back to the bed and breakfast room and with a dial up connection to
Mexico, of all places, I was looking up code on how to change colors and photos, and I
made the first filter there on the spot. It's still in the app, called X-Pro 2.

HOFFMAN:​​ X-Pro 2 was one of the 11 original filters that Instagram launched with. Each of the
distinctive filters added the kind of blurred edges, color wash, and light leaks that gave even
mediocre photos a sense of nostalgic meaning.

And when Instagram launched, there were a lot of mediocre photos. Phone cameras were still
primitive.

SYSTROM:​​ Many years later when I looked at the idea of having this kind of like not so
great iPhone 3G camera, I mean, back in the day I was kind of blurry, effectively like a
toy digital camera and I was like, you know, the goal here isn't to make this beautiful, the
goal is to like deal with the imperfection. So that's like honestly where the inspiration
came from.

HOFFMAN:​​ So, like the iPhone 3 cameras are like little mini digital Holgas.

SYSTROM: ​Totally.

HOFFMAN:​​ It was as if Kevin and Mike had handed each of their friends a Holga, and told them
not to sweat the details. Instagram will give your snaps the wow factor. All you need to worry
about is pointing and shooting.

SYSTROM: ​Any person we gave it to, their eyes lit up because they were like, "Oh, like
my photos seem so much better now." And that was the moment when we realized, "We
think we have something.”

HOFFMAN: ​Filters were the simple feature that set Instagram apart. But Instagram also made it
simple to share those beautiful photos. And this was its true secret to scale.

SYSTROM: ​I remember hearing from people. They're like, "Wow, I just got a like." And I
was like, "Yeah, because it's a network." And they're like, "Oh, I didn't realize that. I
thought it was just a camera app."
HOFFMAN: ​Before Instagram, other photo apps kept people inside them. They didn’t create a
network in the app, and they didn’t leverage social networks. But here, with instagram, the loop
was piggy-backing on all these existing networks.

SYSTROM:​​ We had Tumblr, Posterous, Twitter, Facebook, I'm trying to remember the
other one's, Foursquare, I think.

HOFFMAN: ​Instagram wasn't the first mobile app to offer photo filters, but it was the first to tap
seamlessly into the social network ecosystem. What it did better than any other app to date was
leverage these new networks to enable massive scale. These networks were like the trade
winds that let Instagram soar, almost effortlessly.

SYSTROM​​: The problem is that you have this app that's a network, but no one's on the
network and it only becomes useful once people are on the network. So you have to
have what we called the “single player mode” feel awesome. And it turns out single
player mode is a app where you could take a photo filter it and share it to many networks
at once, that was utility in “single player mode”, like no one else needed to use
Instagram at the time to make that useful. It was a tool for you.

But if we wanted to get lots of people downloading it, they'd have to see the photos, the
output. And it just turns out the square photo and the borders and the links to Instagram
were calling cards, which effectively said, "If you like what you see, you too can go do
this exact thing, download this app."

HOFFMAN:​​ Instagram was an Insta-hit. On its first day on the App Store: 25,000 downloads.
Within a week: 100,000. Within ten weeks: 1 million users. Instagram had entered multi-player
mode.

The viral loops were kicking in, with some strategically placed help. Kevin and Mike had put the
app in the hands of 100 artist-influencers. And it paid off.

SYSTROM: ​So we went out, we got all these influencers who are photographers and
designers to sign up and I think we had 100 people sign up, and the day we launched,
they started posting all their photos to Twitter and to Facebook and we figured out the
viral loop to help it grow and it just exploded.

HOFFMAN: ​Simplicity, combined with the leverage of all these outside forces, is what allowed
Instagram to scale.

However, to maintain that scale, simplicity is not enough. You may remember a slew of simple
Facebook games called things like “Zombie vs Werewolf”. You’d get bit by a Zombie or a
Werewolf. Then you’d turn into one. You would then bite your friends to try and recruit them to
your team. It was simple. And fun. And reached massive scale. And then? User numbers
tanked. It was entertaining for a bit. But it didn’t tap into an ongoing need or desire.

In order to scale, you have to tap into a fundamental human need. That feeling of being
connected, of being a part of the tribe, is the fundamental need that let Instagram scale to a
huge number of users and persist.

Instagram scaled fast from day one. It was as if they steered their glider straight into gale-force
winds. The night of the launch, their servers crashed. Kevin put out an SOS.

SYSTROM:​​ I called up my friend Adam D'Angelo who was CTO at Facebook, I think he
had left at that point, but he knew how to scale a very large service or at least a service
of our scale.

HOFFMAN: ​Just as Instagram, the app, soared by drafting off of much larger social networks,
Instagram, the company, drafted off the founders' social networks. That night of the launch,
Adam talked Kevin and Mike through how to stabilize their servers. They set up a text alert for
when their servers went down. That ringtone haunts Kevin to this day.

SYSTROM:​​ Every time I hear that ringtone today it literally makes my insides turn.
Because like the number of times our servers would go down at 2:00 am or I'd have to
step out of a birthday party or miss a concert whatever like, too many to count. So, I now
have a mild form of PTSD with that specific sound.

It's the only true, I think, fight Mike and I have ever had, which was: we were scaling and
he was like, "We're going to need another server." And I was like, "No, we don't." And it
was because, I don't know, I was really cost-conscious and like it was going to be
expensive to start up a new one. I mean not expensive in today's terms but, I remember
that was the one really big disagreement we had and it lasted about a minute and then
we’d calm down and I was like, "You're right."

HOFFMAN:​​ I think there may have been more to Kevin’s reluctance than cost-consciousness.
Kevin was still in early-day founder mode. He was hungry for the thrill of the fight. And this
perhaps led him to equate simplicity with doing everything on a shoestring. In this case, keeping
their server count down was not the simple solution. In fact, it added complexity

It’s an easy and ironic trap to fall into: by trying to stay true to simplicity, you overthink things.
And before you know it, you’re in a tangle of complexity. It’s a pitfall that comes in many guises,
and one we may not even realize we have stumbled into. Someone who has spent a lot of time
thinking about this issue is Rohan Gunatillake. He’s the creator of Buddhify, the app that helps
people make meditation a part of everyday life.
 ROHAN GUNATILLAKE:​​ One of my favorite definitions of meditation is that meditation
is a training in simplicity. From a mindfulness perspective, I would say that simplicity and
complexity are actually not the opposites of each other. If you look at it in a different way,
simplicity is what's here and complexity is what we lay on top of it.

HOFFMAN: ​Note that Rohan isn’t saying complexity is necessarily bad. But it is something
humans have a tendency towards. But there is a simple way to avoid it.

GUNATILLAKE:​​ Turning inside with our attention and noticing what’s there whilst it’s
happening. Really simple.

So, for me right now as I'm sitting here doing this interview, talking to you, what's
happening is calm, warmth, amusement, relaxation, not sure, calm, tingling. So, that's
basically my experience. So what I was just doing there was a type of technique called
“out loud noting”, it's actually one of my favorite techniques. That experience, those
words, were an expression of what was happening inside myself. It wasn't particularly
sexy or dramatic, but just the reality of my inner experience. There's a beautiful simplicity
to that.

HOFFMAN:​​ But even when we’re trying our best to glide towards simplicity, these efforts
themselves can bring us into complexity.

GUNATILLAKE: ​Along the way, sometimes, some of us can get fixated on the process
as opposed to the outcome. Suddenly, the startup is more important than solving the
problem. Suddenly, my status as a meditator is more important whether I can actually be
present with my two year old when I'm playing with him.

I see it all the time in both of those worlds and I think a really powerful thing to do
whether you're thinking in the context of business or in the context of mindfulness
practices is that every time you're practicing, remind yourself why you are doing it. That
will give you the orientation, the energy, and the inspiration to avoid falling into that pitfall
or that trap. It's something I've done several times in the past, both on the business side
and the meditation side.

HOFFMAN: ​Kevin and Mike made brilliant choices to keep their product and staff simple.
Remember those numbers? They ran a massive service with the leverage of just 13 employees.
They were able to keep their staff small because of the specific decisions they made to keep
their product simple. They simply didn’t do things that other companies would have considered
vital. Instagram was an iPhone app. It wasn’t on the web. It wasn’t even on Android. They didn’t
make any revenue, so they didn’t need sales. They didn’t need payments.

These choices allowed them to stay small. And there are huge benefits to having a small,
massively leveraged team: It's easy for everyone to cohere. Communication is simple. Costs are
seriously low. And it's maximum productivity per individual. Everyone feels the importance of the
mission and understands their place in it.

But with only 13 employees, Kevin took this to the extreme. Even he doesn’t recommend it.

SYSTROM:​​ This is painful to relive. Mostly because I look back and our lives for those
first two years would have been so much better had we just hired. I love leverage and I
love, you know, the fact that we were able to scale a service with 13 people. I mean, we
were like, on average, like six people for that first year, we only hired up to 13 right
before we got acquired. So, whenever people are like, “Oh, 13.” I'm like, “Actually it was
more like five or six.” Our lives would have been a lot easier. So lesson number one is
find great people that know their stuff because there are a lot of them in the world and
they would be happy to deal with the problems that you're currently facing. That is the
lesson number one of growing a company.

HOFFMAN: ​By early 2012, the viral loop was in overdrive. Users flocked to Instagram. And the
more they came, the more unstable the service got. Kevin and Mike knew it was time to invest
big in infrastructure. They needed servers. They needed data analysis. And they needed
people. But they were yet to see a dollar from Instagram itself. They did a deal with a group of
investors, including Greylock. But just days after, Kevin announced that he had done a deal with
Mark Zuckerberg. Facebook would pay $1 billion to acquire Instagram.

SYSTROM:​​ The decision to sell was mostly about whether or not we were aligned in our
vision of Instagram and I think Mark and I both saw at the time that Instagram was a
special thing. It wasn't going to be like, "Oh, we'll buy this thing and it'll just be Facebook
Photos." Like, “We’ll rebrand it as Facebook Photos.”

It's a unique community and had a unique angle and he wanted to invest in it. And that's
the way I look at it, it’s kind of like we switched investors and we had a new board and
that board became some of the smartest technologists that Silicon Valley had, which
was the Facebook management team.

HOFFMAN: ​When Facebook acquired Instagram, some people snickered at the billion dollar
price tag. But investors didn’t. It was seen as the total bargain of the century. For Facebook, the
deal was a leg-up into mobile.

As for Instagram, it now had access to the resources that would propel growth even further. This
meant no more late-night text messages about crashing servers. The ghost of that ringtone was
banished.

SYSTROM:​​ We had a pretty broken infrastructure, because it was duct taped along the
way and I don't regret that at all, like we had to duct tape it along the way, but we spent
 the first month or so stabilizing. It turns out stabilizing helps growth, because it's more
stable people enjoy it more, people can sign up more reliably.

HOFFMAN: ​Now Instagram might have gotten to even greater scale without being acquired, but
there was a bunch of stuff that Instagram got from Facebook. It got scale infrastructure in terms
of how to handle all the data loads and build scaling servers. It got detailed ad targeting and
systems, and a sales force for doing it. Instagram could have built these things itself but it would
have taken time and it might not have worked. Meanwhile, Facebook and others could build
their own Instagram competitors.

In Facebook, Kevin and Mike saw a powerful wind that could take them to an entirely new level
of scale. Facebook gave them this new updraft of scale. Facebook also had something else: a
sophisticated means of measuring and capitalizing on user growth.

SYSTROM:​​ And I believe they had pioneered this, was the growth accounting formula,
which is okay like your net growth on any given day, you can break it up into separable
parts: It's how many new people came in the door, how many people decided to stop
using you, and then how many people who used to use you decided to use you again.
Plain and simple, those three terms equal net growth.

HOFFMAN: ​This analysis meant Kevin and Mike could hone the viral loop.

SYSTROM: ​There were a bunch of those critical numbers early on that then we kind of
started to instrument and realize, “You know what, like what percent of users get this
number of followers in the first week?” And we could track that and then ask ourselves,
"Hey, how do we drive more followers to people and how do we make sure that new
users get enough engagement on their first few posts?" Without measurement, you're
kind of wandering around in the dark and you're not able to produce something that has
product market fit.

HOFFMAN: ​But even with this influx of resources, there was one thing Kevin and Mike were
determined not to change: their commitment to keeping Instagram simple.

SYSTROM: ​Our first value meeting, when we read out our values, the first one on the list
is keep it simple. When we started Instagram we went from solving three or four things to
solving one really well and we saw that pay off in spades. And I think the hard part is
when you grow a service and let's say you have hundreds of millions of people using it,
you have varying use cases. You have varying stakeholders: some are businesses,
some are celebrities, some are video stars, and some are creatives. You have pets on
Instagram, right? Like how do you keep it simple when you have so many people use it?

HOFFMAN: ​To this day, they have regular meetings so the whole team can re-examine the app.
So Kevin thinks long and hard about adding new features. And he will only do so if there is a
clear case for them. Often, that means spotting any interesting or unexpected ways people are
using his product.

SYSTROM: ​So when we added video to Instagram, that was a big move. That's an
evolution of how people were already using it stories. Same thing. Messaging, people do
it all the time in comments. So adding complexity is okay as long as you don't add
orthogonal use cases that feel totally unrelated. When we do that, we typically launched
separate apps or we consider doing that.

But I think it's important not to just like not build features. I think it's important just to think
about the number of use cases that you have and ask yourself: are you keeping those in
a limited set?

HOFFMAN: ​It’s something worth asking yourself on a daily basis. But don’t let it turn into an
exercise in self doubt. Many ideas require careful thought, but they also need swift and decisive
action.

SYSTROM:​​ Far too many times entrepreneurs assume that things aren't reversible. Jeff
Bezos talks about one-way doors. He likes employees to make decisions quickly when
there are two-way doors or revolving doors. But when there are one-way doors, think
long and hard. And I think often people confuse one-way doors and two-way doors.

HOFFMAN: ​There’s a danger if you rush through a one-way door that you won’t be able to find
your way back inside. But the greater danger is not taking any doors.

SYSTROM: ​If you don't change the service, I think the world changes underneath you
and you become less relevant. So the lesson is to not, not change the service, but rather
what do you change it to? And when you change it, how do you keep it feeling simple?

HOFFMAN: ​This philosophy of Kevin’s, like Instagram itself, is a study in simplicity. Kevin
knows that the winds around him are changing constantly. And in order to stay aloft, you have to
steer toward the most powerful prevailing winds. You might even need to redesign your glider.
But it has to remain simple.

I'm Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Linda Rottenberg

LINDA ROTTENBERG​:​ ​I had been living in Latin America in the mid 1990s—and this is
the time when Netscape and Yahoo are all happening, and everything is abuzz in the
United States. And in Latin America, where I'd been living, no one was starting a
business. And I kept wondering, “Why?”

REID HOFFMAN​:​ ​That’s Linda Rottenberg, the co-founder and CEO of Endeavor, a
not-for-profit that connects entrepreneurs to local investors in more than 30 countries. You might
wonder what prevents investors and entrepreneurs from finding each other. Surely, the invisible
hand should be clapping these two groups together. But it doesn’t always happen, and it
definitely wasn’t happening in Latin America in the 1990s. Linda got her first clue during a cab
ride through Buenos Aires.

ROTTENBERG​:​ ​I was in a taxi, and my driver mentioned that he had an engineering

degree. So I thought, “Oh, well, you must be one of these people starting a business,”
and I couldn't think of the word. And he kept using the word “impresario,” which meant
“big businessman who had Swiss bank accounts and government connections.” And I
said, “No no no no, es impresario.” No, it’s another word. And we went back and forth,
and he said, “No, no, I'm sorry, there's no word like that here.” And I realized, at the time,
there was no word even for entrepreneur in Spanish. And so I thought, “Well, if you can't
name it, you can't be it, and you can't tell your parents you are one of these.”

HOFFMAN​:​ ​This wasn’t just a single word lost in translation—it was a whole mindset. You might
call it the animating spirit of Silicon Valley. Because what truly draws entrepreneurs to Silicon
Valley is a founding mythos, a shared belief that any entrepreneur can disrupt any
industry—even if that industry is run by an army of ​impresarios​.

You have to believe that investors and talent will flock to you like a flash mob, and overwhelm
your mightiest competitors—government connections and Swiss bank accounts be damned.
And this is a hard myth for the rest of the world to swallow.

ROTTENBERG​: It sounds so corny, but I grew up as this middle class girl in Newton,
Massachusetts, thinking I can be the next Steve Jobs. Why not? And it was so foreign to
me that people didn't grow up with that same belief system. And so I felt—again, with no
reason why—that we could change that entire system.

HOFFMAN​: I agree. You ​can​ change that mindset. You ​can​ build other Silicon Valleys,
anywhere in the world. But you should know that it's really, really hard. You need the mindset,
the mentors, and the entire ecosystem to create a Silicon Valley. So when and where might it
happen? You’re about to find out. On today’s show, we go in search of the next Silicon Valley.

[THEME MUSIC]
HOFFMAN​: This is Masters of Scale. I’m Reid Hoffman, co-founder of LinkedIn, investor at
Greylock, and your host. I believe that Silicon Valley’s collective wisdom for scaling a startup is
currently unmatched. But I also believe that other Silicon Valleys can be built, elsewhere in the
world. It’s just that it’s really, really hard. You need more than startups. You need a constant
stream of entrepreneurs and ideas, and capital, and companies of all sizes. You need an entire
ecosystem to create a Silicon Valley.

To fully understand that, it helps to demystify Silicon Valley’s recipe for success—and it ​is
mystifying, when you think about it. Silicon Valley has a population of 3 million people. That’s
less than 0.1% of the world’s population. And yet, they’ve launched nearly half of the world’s
most valuable tech companies, with a valuation of more than $100 billion dollars. You can see
their headquarters clustered along a roughly 50-mile drive between San Francisco and San
Jose. Head south from San Francisco, and you’ll pass most of them within an hour. Once you
pass the Netflix headquarters in Los Gatos, your tour is over. The multi-billion dollar companies
peter out; you’re back in the normal business world.

But Silicon Valley is so much more than an archipelago of thriving tech companies. It’s a deeply
interconnected ecosystem, and that’s what you need. You need entrepreneurs with ideas, yes.
But you also need people who are skilled in ​every​ discipline needed at ​every​ company, at e
​ very
stage. Not just engineers and product managers—but also lawyers, accountants, marketers,
recruiters, operational geniuses. You need places for them to gather, and media outlets to
share their ideas. You need world-class universities with their constant supply of young talent,
and venture capitalists to invest in them. And, importantly, you also need successful
entrepreneurs who pay it forward. These are the things that make Silicon Valley
unstoppable—for now.

So which city might claim the title of “the next Silicon Valley?”

I can’t think of a better person to ask than Linda Rottenberg. As CEO of Endeavor, she’s spent
the past two decades growing Silicon Valley-like ecosystems in more than 30 countries. She’s a
consummate networker. If LinkedIn sprouted legs and started talking, I might imagine it would
sound like Linda. Drop her in any country, and she will start making connections.

But in the course of her connecting, Linda noticed a chronic disconnect. In many of the places
she visited, there was a gaping hole between the bright, young entrepreneurs and the investors
who might take a chance on them. That conversation she recalled from the cab in Buenos Aires
played out again and again in her travels across South America.

ROTTENBERG​: I would travel to Brazil and to Mexico and Chile—no young people who
weren't from the top 10 families were starting companies. And they all wanted
government jobs. And I thought, “Government? Really? Who wants to work for the
government?”
 And when I would dig in, they would say, “Well look, you can get a $10 dollar or $50
dollar microcredit loan, but we don't want to just create a tiny business. Or you can get a
$50 million dollar investment—if you're already part of the rich families, that we aren't.
We don't have the right last names.” And I would start to tell the story of Steve Jobs and
Steve Wozniak starting Apple. And I remember in Brazil, a young kid came up to me and
said, “Linda, that's a nice story, but how does it relate to my life? No one in Latin
America is going to give me money for my crazy idea. And I don't even have a garage.”
And that's when it hit me—you need local role models.

HOFFMAN​: Now here’s what’s so unusual about Linda. She might have reasonably concluded
that she had underestimated the challenges young entrepreneurs faced in these countries.
Surely, they knew the obstacles to starting a business better than a New England yankee with
an idealistic bent. How could they possibly compete with the connected families on an uneven
playing field? It would take years of legal and structural reform. It might not even be possible.
Linda begged to differ.

She was convinced that if she could point to one local success story, a Steve Jobs or Mark
Zuckerberg of South America, she could short-circuit the debate. One iconic entrepreneur could
stand as living proof that you don’t have move to Silicon Valley to scale a business. And if that’s
true, why shouldn’t 1,000 Silicon Valleys bloom? Sure, it took decades for Silicon Valley to
develop its talent for scaling, and Linda would have to start from scratch in every community she
worked in. But you have to start from somewhere, right? Linda and her co-founder, Peter
Kellner, started at the kitchen table.

ROTTENBERG​: And we actually came to my parents kitchen table to write on a napkin

the business plan for Endeavor. My parents freaked out. And in fact, my parents
overheard us plotting this global organization that was going to support high-growth
entrepreneurs in emerging markets. And my mother looked at my father like, “You've got
to stop this.” And my dad gently came over and reminded me that I needed to be
financially independent, I didn't have anything to fall back on—and this didn't sound like
job security.

And I refer to this as my “kitchen-table moment,” which I think a lot of entrepreneurs

face—which is, it's really scary to tell your family that you're going to do something
unconventional. And you have to make this choice—do I do what's safe and expected, or
do I venture into the unknown?

HOFFMAN​: Linda was convinced that high-impact entrepreneurs can be found anywhere—and
we might hear from them more often, if only they could push through their own “kitchen-table
moment.”
 ROTTENBERG​: To me, the biggest problem is the best ideas don't die in the
marketplace, or in the laboratory—they die in the shower. Because people don't even
give themselves permission to walk out of the shower, and write it on a napkin, and take
it into the world, because they're afraid of what others are going to think about them. And
they're afraid that people are going to say, “Well, this is just a crazy idea.”

HOFFMAN​: Every business idea involves some measure of risk. But the most scalable business
ideas don’t just sound risky, they sound downright crazy. And if you haven’t heard the Masters
of Scale episode called “Beauty of a Bad Idea,” I’d suggest listening to that next. You’ll get a
sense of how hard it is to take a scalable idea out of the shower and into the world of skeptics.
And the farther you move away from Silicon Valley, the harder it is to find someone who will
take a crazy idea seriously.

That’s because Silicon Valley has styled itself as an El Dorado of crazy thinkers—a place where
bold investors champion misfit entrepreneurs. Few people will actually say this, but I’m going to:
You’re taking a huge risk if you try to start a tech company anywhere outside of Silicon Valley.

The metaphor that I use for entrepreneurship is you jump off a cliff, and you assemble the
airplane on the way down. And there's a bunch of ideas that are compacted in that metaphor to
make it very simple. Part of it is that the really committed entrepreneurs will move to wherever
they need to be in order to be more successful, because they already know they're taking this
huge risk.

So if you're in New York, or L.A., or Austin, or Boulder or wherever, and you don't say, “I'm
going to move to Silicon Valley to build this company,” the question is, “Why?” You might say,
“Look, I’ve got a whole wide swath of great engineering talent here. I can raise the capital
myself. I know there's a capital edge, a go-to market edge, a talent edge, and everything else in
Silicon Valley, but I will overwhelm it from the other innate advantages that I have, and I'm just
willing to take those risks.” That's fine. And by the way, some of those companies happen and
succeed. G​roupon was smart to stay in Chicago, because it’s a sales-driven business—and
sales is not Silicon Valley’s strong suit. Kickstarter benefited from New York’s thriving art scene,
and it’s not clear that its user base would have scaled as swiftly in the Bay Area.

But unless you have a truly compelling reason, such as staying close to your customers, I
believe that you currently ​have​ to come to Silicon Valley to scale a tech company. And I wish it
weren’t such a stark choice for entrepreneurs. We all lose when a great entrepreneur can’t scale
an idea, due to an accident of location.

And the fact of this unequal access drove Linda crazy. In 1997, she launched Endeavor, a
non-profit that would connect high-impact entrepreneurs to their nation’s business elites.

Now you might think her plan to cultivate a generation of disruptive entrepreneurs would place
in her opposition to the so-called impresarios—the businessmen with the political connections
and the Swiss bank accounts. On the contrary, those are precisely the people she turned to to
get this network up and running. To her, it was clear that they could be powerful allies. But first,
she had to convince them to take a risk on unknown local entrepreneurs.

ROTTENBERG​: So after that kitchen table moment, I told Peter that I would go to New
York to raise money, and he had to go down to Latin America. So he did, and he called
up and said, “Linda, I got you a meeting with Eduardo Elsztain.” Eduardo was, at that
point, the largest landowner in Argentina, who famously had walked into George Soros—

COMPUTER​ ​VOICE​: George Soros is a billionaire and one of the world’s most
successful investors.

ROTTENBERG: ​And convinced him to invest in Eduardo's company—and George

Soros had ended up investing $10 million dollars. I had a 10-minute meeting with
Eduardo. Five minutes into the meeting, Eduardo looks at me and says, “OK, I get it.
You want a meeting with George Soros. I'll see what I can do.” And I looked at him and
said, “No, Eduardo. You're an entrepreneur. I'm an entrepreneur. Endeavor’s an
organization of, by, and for entrepreneurs. I want ​your​ time, ​your​ passion, and $200,000
dollars.

Eduardo turns to his right-hand guy Oscar—and the meeting had been in English, but he
turns in Spanish—and says, “Esta chica esta loca”—”This girl is crazy.”

HOFFMAN​: To clarify—he said, esta, not “es.” “Esta: implies a temporary condition of craziness,
not a permanent condition. There’s hope yet for Linda.

ROTTENBERG​: So I responded in Spanish, “Eduardo, estoy decepcionada”—you know,

“I'm disappointed. This, from the guy who famously walked into George Soros’ office and
came out with $10 million dollars. You're lucky I only asked you for $200,000!” He turned
away. I thought he was, again, going to kick me out. This is the story of my life—I stalk
people, and then I think I’m going to get thrown out of the room. But instead, he turned to
the floor, took out his checkbook, and wrote a check on the spot for $200,000 dollars.
And to this day, Eduardo says it's the best investment he ever made.

HOFFMAN​: So Linda now has $200,000 and a successful entrepreneur who was ready to play
the role of mentor. She only had to find one final node in her embryonic network—an
entrepreneur to take a chance on. And she found one: a former sheep farmer with a flair for big
ideas.

ROTTENBERG​: Wences Casares was a kid who'd grown up on a sheep farm in

Patagonia. He creates the first Internet service provider, it gets taken over, he gets
thrown out of the company with nothing. He's 24 years old, and he decides, “I'm going to
go start the first E*TRADE of Latin America.” So we meet him, and he had been turned
 down by 34 local investors. He had his sister and his best friend working for him. And we
just met him, and said, “This guy is on to something.”

HOFFMAN​: Wences, on the other hand, thought Linda was ​on​ something.

ROTTENBERG​: He thought that myself and my co-founder Peter were running a cult.
He thought it was a religious cult, because why would anyone want to actually help
someone who didn't have the right last name? You know, there wasn't even the word for
“entrepreneur.” So yes, even Wences thought I was crazy.

HOFFMAN: ​But Linda is “la chica loca.” She actually wrote a book called ​Crazy is a
Compliment,​ which explains why she didn’t care if Wences thought Endeavor was a cult. She
convinced Wences to join anyway.

ROTTENBERG​: We ended up helping Wences raise capital from Fred Wilson, then of
Flatiron Partners and Chase Capital. We ended up helping him find a COO.

What happened was 18 months later—this kid who everyone knew, 34 investors
had turned him down, came from nowhere—sells his company Patagon.com to Banco
Santander for $750 million dollars. All 34 investors call us up within a week, say, “Uh,
you got another 20-something-year-old with some strange idea?” And kids from all over
Latin America—it wasn't just Argentina. Kids had heard his story in Chile,
elsewhere—they started to say: “If Wences can do it, I can too.”

HOFFMAN​: With the success of Wences, Linda began to enlist impresarios across Latin
America to think globally, and invest locally.

ROTTENBERG​: But then it was really in 2000, when I got called into a room by Pedro
Aspe, the former finance minister of Mexico, who was then leading the largest private
equity firm. And he had gathered a group of about 12 individuals. And before I walked in
the room, someone said to me, “Linda, do you know what percentage of Mexico's GDP
is in this room?” And I said, “No, and I don't think I want to.”

And one of the people in the room said, “Well, why are all these entrepreneurs coming
out of Chile and Argentina and Brazil—even Uruguay? What's wrong with Mexico?” So
in my, oh, politically astute way, Chica Loca says, “Well, here in Mexico, you're the big
fish. And think of entrepreneurs as the little fish. And here, the big fish tend to eat the
little fish. So if you want something like Endeavor, think of us like an aquarium where you
learn to feed the little fish.” And they all signed up. And in fact, a decade later, Emilio
Azcarraga, one of his magazines had a survey on entrepreneurship in the country, and
the headline was “Big fish feeding the little fish.”
HOFFMAN​: This headline—”Big fish feeding the little fish”— is funny. But it’s also profoundly
important. If you’re a big fish—like those magnates sitting around that table with Linda in
Mexico City—you need the little fish. Paradoxically, your long-term survival depends on feeding
them instead of eating them—because a flourishing business ecosystem needs entrepreneurial
life at all scales.

A great way to picture this is to imagine a coral reef. Coral reefs are beautiful, productive
ecosystems that support every level of life. But coral is itself a living creature. And every coral
reef started with a few baby coral who landed there and took root.

So what are the secrets that allow an ecosystem to thrive? We asked a marine biologist what
we could learn from coral reefs.

KRISTEN MARHAVER​: Corals are ridiculously crafty, and that's one of the reasons I
love studying them.

HOFFMAN​: That’s Kristen Marhaver. She’s a marine biologist at the CARMABI Research
Station on the Caribbean island of Curaçao. She’s also a TED Fellow, and you may know her
from the short talk she gave on saving baby coral. She has a real soft spot for those baby coral.

MARHAVER​: And the science is always kind of mind-boggling, because you're looking
at this little tiny dot in a petri dish. It has the capability of living for hundreds of years and
growing to be the size of a basketball or a boulder or a car, and it just starts out as this
little tiny blob of fat. So even though I've seen it dozens of times, there's always one
moment per year where I think, “This can't possibly be how corals are born. This is so
crazy.”

HOFFMAN​: Marhaver invents methods to plant these crafty little embryos in the wild with the
hopes of cultivating new coral reefs.

But getting those eggs to find their footing on the sea floor, it’s a bit like helping the world’s
unknown, would-be entrepreneurs get their crazy ideas out of the shower. They die a million
microscopic deaths.

MARHAVER​: There were years and years where researchers could figure out when the
coral spawned, and could collect eggs, maybe get them to fertilize—and then almost
every time they tried, the larvae or the eggs would die within a day or two, and nobody
really knew what was going wrong. So it was super stressful and super intense. There
were tears. So through time, every year, the field as a whole made inches of progress,
and each of those “aha” moments was definitely hard-won.

HOFFMAN​: Those hard-won victories have changed the way that scientists think about coral
reef conservation. They are now eager to understand the conditions under which coral thrive.
And they’re finding that coral are super finicky about real estate, but super hardy once they find
the ideal location.

MARHAVER​: They've got one chance to pick the right place to live, and they're literally
stuck there from then on. So they've been through tons of evolutionary pressure to get it
right.

HOFFMAN​: There’s an awesome metaphor here: Silicon Valley is like the great barrier reef. It’s
so big and complex that we assume we could never create an ecosystem on that scale from
scratch. Then Linda comes along, plants a little colony and says, “Look, this mind-boggling
growth process has already begun.”

ROTTENBERG​: When we talk to our entrepreneurs today, they say that one of the
things that Endeavor helped them do is change the mindset that it was a dog-eat-dog
world, and you had to kill your competition before you got killed yourself.

And this idea of supporting one another, the idea of sharing ideas, the idea that it was
OK if you trained people and then other people hired them away—that's what creates an
entrepreneurial ecosystem. People hiring the Googlers, and people hiring the
Facebookers. Now we see that happening in our markets. But that was anathema.

HOFFMAN​: What does it take to build a flourishing ecosystem so it eventually grows

organically, without the assistance of Linda and Endeavor? Linda argues that it only takes a few
success stories, like Wences Casares, to set the whole process in motion.

ROTTENBERG​: We have mapped out in terms of entrepreneur-to-entrepreneur touch

points, and the density of those touch points. And the way we did this through
Endeavor's research group is we asked in countries where we were—in Argentina, in
Turkey, in Jordan, in Colombia and around the world—We asked startups. So
Endeavor's about to scale up. So we asked people we didn't know yet, that were early
stage, five questions.

We would go to people just starting companies, and say five things: “Who mentored
you? Who inspired you? Who invested in you? Have you started a company before, are
you a serial entrepreneur?” And, “Did you work for an entrepreneurial firm before?” The
talent component. And we would map out their connections, and here's what we see:
early on, there's no density. There's a few entrepreneurs isolated; they don't touch each
other. No one is investing. And as you start to see the places where, as I said, the
successful entrepreneurs become—and I know you haven’t loved the term PayPal
mafia—but they become that Paypal mafia, the Googlers, the Facebookers, the people
who actually reinvest.

We actually see, through visual touch points, that four or five people can inspire, mentor,
 and invest in practically the entire ecosystem. And then what happens? One of the
missing ingredients early on is talent. It's really hard to find any C-suite talent if you're
just starting out.

Once you have success stories, and people who've built 1,000-person jobs and trained
them, then what you see later on, a decade later, is that people actually not only can find
the mentorship and the capital to start, but the talent to actually scale businesses.

HOFFMAN​: So the term “PayPal mafia” refers to the original PayPal crew like me, Peter Thiel,
Max Levchin, Elon Musk, David Sacks, Jeremy Stoppelman, and a few others who have since
gone on to launch their own companies and invest in others. And I do hate that term “PayPal
Mafia.”

HOFFMAN:​ Mafia has this kind of sordid undertone. You know, the the bodies are
buried in the backyard. ​A​nd you know, it makes for a sexier magazine cover. It kind of
gives you that little bit of sizzle for what the thing is.

I prefer the term PayPal network, but that’s not going to sell magazines. In any case, as
a confirmed member of the PayPal network or mafia or whatever you want to call us, I
can tell you about our private conversations. They’re not as salacious as, “Hey, Elon, I
found the perfect marsh where you can hide the engineer’s body.” Instead, we talk about
little fish that might become big fish—and we talk about it constantly.

If you have four or five people who are really dedicated, who trust each other, working
together, they can be the core of an exponentially larger network around them—because
they can be forming them, they can be setting the rules, the norms; they can be
facilitating, bringing projects to life. Because part of what we are doing in the PayPal
mafia is, “Hey, I'm looking at this company. You think we should invest in this?” “Yeah, I
think we should invest in that,” or “Hey, I'm starting Yelp. Who are the people we should
talk to on financing? What do you think about talking with these people?”

And so more and more companies grow up around them. And then as all those
additional companies, now you have a much denser network of people with successful
companies, resources, talent pools within those companies, a knowledge base about
what to be doing. That gives you a diversity of resources, and knowledge, and
companies to create a whole ecosystem.

I want to be clear, we are not the original gangsters of Silicon Valley. Every successful founding
team—at Google, Facebook, wherever—spawns its own little network. And there’s nothing
magical about the networks in Silicon Valley. They can take root just about anywhere that you
have a few successful entrepreneurswilling to pay it forward. Linda has a great example from
Turkey.
A​ poll in Turkey asked college students to name their top three entrepreneurial role models.
Number one was Steve jobs. Number two, Mark Zuckerberg–and number three was Nevzat
Aydin. He supplanted Bill Gates. He’s not just an icon, though. Linda explains how Nevzat pays
it forward, quite literally.

ROTTENBERG: ​There is a company in Turkey, in Istanbul, founded by Nevzat Aydin

and Melih Odemis. İt's called Yemeksepeti. It is an online food delivery company. They
started it, they scaled it, they created many, many jobs. Well, what happens is
Yemeksepeti gets bought by Delivery Hero for $589 million dollars. It's the largest
Internet exit in Turkey's history. Nevzat and Melih, who did very well, take $25 million
dollars of their own personal earnings. They had kept a ledger of every employee's
responsibility and roles, and hand out the cash as if they had stock bonuses. CNN calls
Nevzat the world's greatest boss. So what else happens? People in Nevzat circle,
they’ve been friends, they go to club together, they talk entrepreneurship, they go to
coffee shops.

And one of them starts a leading gaming company, and the other starts an online jewelry
ecommerce business, Hakan Bas. And Hakan one day gets a call from Nevzat. And
Nevzat says, “I have a problem with you, Hakan. I keep seeing you in the news dating
models.

You're not spending enough time in your company. And Hakan says, “No one ever said
this to me.”

This is what builds up ecosystems. And when you think of Silicon Valley, you think of the
coffee shops.

HOFFMAN​: And it’s not just the coffee shop, but any number of common spaces where the
varied creatures of entrepreneurial life mingle and learn from one another.

Classic examples include Bucks restaurant in Menlo Park, where the venture deals get done,
the coffee shops, like Coupa Cafe or University Cafe, where programmers and students tend to
mingle and get recruited, accelerators like Y Combinator, where entrepreneurs swap insights
and commiserate about the insanity of startup life.

I’d argue these common spaces are just as vital to Silicon Valley as the headquarters of
Facebook, Google or LinkedIn. Conversations tend to spill out from the company walls and
across the Valley. Think of Silicon Valley as a vast, deep learning machine, that sends
information careening through its network. And this, I believe, gets to the essence of what we
should look for when we ask, “Where’s the next Silicon Valley?”

Forget the tech, and focus on the talent. Is there a density of talent—sharing, swapping and
learning from each other’s experiences? Once you take this broader definition of Silicon Valley
as a hub of entrepreneurial excellence, beyond the high-tech stuff, then the truth is you can find
the next Silicon Valley just about anywhere.

Entrepreneurial networks form spontaneously and grow at stunning speeds. Take, for instance,
the nascent network in Nairobi, Kenya.

JULIANA ROTICH​: There wasn't a space for techies to meet up. There just
wasn't—period.

HOFFMAN​: That’s Juliana Rotich, the co-founder of the mapping platform, Ushahidi. Ushahidi
means “witness” or “testimony” in Swahili, and it was originally launched in 2008 to help citizens
report violent incidents across Kenya, in the wake of a contested election.

ROTICH​: We didn't actually have a physical space. We would have meet-ups at sort of
dingy places actually that weirdly had wifi. So there's a supermarket nearby that we
would often meet at because it had wifi. So you have all these geeks and nerds meeting
at a specific supermarket, and the only reason why they're doing that is because it had
free Wi-Fi.

HOFFMAN​: Since 2008, Ushahidi has become the mapping platform of choice for nations
caught in a crisis. Activists have used Ushahidi to map all kinds of events, from a 7.8 magnitude
earthquake in Nepal, to sexual harassment in the streets of Cairo. Juliana also co-founded a
shared workplace called the iHub.

ROTICH​: Now many more co-working spaces have sprung up, not just in Kenya, but all
over Africa. It's been really, really gratifying to see the tech space evolve.

HOFFMAN​:​ ​Today, Juliana estimates there are another 12 hackerspaces like iHub in Nairobi
alone. Bear in the mind, they’ve all opened in less than a decade. I asked Sam Altman, the
president of Y Combinator, about his unconventional pick for the next Silicon Valley.

SAM ALTMAN​: Maybe L.A. is a more interesting case. L.A. has not been traditionally
thought of as a hotspot for startups at all—at all. And yet somehow, while everyone was
talking about New York as the second Silicon Valley, I think there's more evidence of
that in other cities—L.A., Seattle. And at this point I'd say you have that density of
network and talent and capital and knowledge and everything else in L.A., and that
happened relatively quickly.

HOFFMAN​: But long before L.A. slipped into the running, Tel-Aviv has been a leading
contender for years. We reached out to Yossi Vardi, who’s often called the godfather of the
Israeli tech scene. Yossi personifies the sort of “pay-it-forward” scale entrepreneur Linda talks
about. He’s helped build more than 80 startups. Our producer, Dan Kedmey, asked him to
make the case for his hometown.
 DAN KEDMEY​: the next Silicon Valley—might it be Tel Aviv?

YOSSI VARDI​: OK, first of all, why “might?” Why not “is?”

HOFFMAN​: Yossi listed all of the usual reasons Tel-Aviv has been so buzzworthy—strong
universities, a thriving tech sector, a workforce that speaks so frankly to the higher ups, it verges
on insubordination. But Yossi finds those answers unsatisfactory.

VARDI: ​I suggest an alternative explanation, which I think explains the whole thing. And
this is because every Israeli kid has one thing in common—and this is he has a Jewish
mother, which drive him crazy from the age of five. Which telling him that he has to
excel, which telling him, why his cousins are smarter than him? Which telling him, “After
all what we have done for you, asking you to bring one Nobel Prize is really too much?”

So the poor kid is growing that way, he has to satisfy his mother. And in order to be a
Jewish mother, you don't have to be Jewish, and even you don't have to be female—it
doesn't relate to ethnicity, or to gender. It's related to your mindset, to your state of mind.

HOFFMAN​: So basically, Jewish mothers, and their equivalence in every culture, are the
ultimate startup incubator. And if that’s true, then someone should study the mothers behind
Boston’s entrepreneurs, because Joi Ito, head of the MIT Media Lab, says Boston’s startup
scene is positively thriving.

JOI ITO​:​ ​Kendall Square is kind of where it's happening, because you you have all the
large pharma companies, you have the biotech startups, you have the biotech
incubators. I think half of all cancer drugs in the last five years came out of the Boston
area. And so we have the kind of critical mass here in biotech that Silicon Valley has in
software. So I think if you think about Silicon Valley as an ecosystem, and not just focus
on the scaling of software, then I do think that you see that in Boston for biotech.

HOFFMAN​: I could go on pointing to startup scenes around the world, which might plausibly
become the next Silicon Valley—New York, Chicago, London, Berlin. But in truth, at this
moment in time, there is only one contender. And I won’t use hedging language. It’s not that this
contender ​might​ give rise to the next Silicon Valley. It has ​already​ given rise to the next Silicon
Valley, and arguably, ​multiple​ Silicon Valleys. Beyond Silicon Valley itself, I believe that the next
Silicon Valley is undoubtedly China. Shenzhen is just one of several cities in China that blow
other contenders for the next Silicon Valley out of the water. I would argue Beijing, Shanghai,
Hangzhou, and possibly Chengdu are all far ahead of any of the cities we’ve discussed so far,
and there’s a common thread running through their successes.

How do I describe a tech scene as vast and dynamic as China’s? I can only give you a
snapshot. The fact is, China’s tech industry is evolving so rapidly, it catches veterans off guard.
Andrew Ng was until recently the chief scientist at Baidu—you might call Baidu China’s answer
to Google. Andrew says you can’t really appreciate the pace of innovation that’s taking place
across China’s major metropolises, until you see them for yourself. Seeing it is as simple as
looking out the window.

ANDREW NG​: I was in Shenzhen about a couple of months ago, and just driving on the
road, I saw companies by the roadside testing new robot designs. And I said, “Wow, I’ve
never seen that before. They’re just out testing it by the side of the road. That's cool.”
Every time I go to Shenzhen, there are new hardware robot designs. The pictures you
see in the media about these hardware bazaars look incredible, but the pictures even
don't do it justice. It’s even more magnificent when you’re there in person.

HOFFMAN​: There’s a common thread running through their successes. First, they have an
enormous number of users through which local companies can scale their services. And
second, they work fast—so fast that Andrew sets an entirely different schedule for his staff in
China.

NG​: You know, just decision making is much faster on average in the China tech world
than in the U.S. tech world. The China tech world is so competitive. Pretty much every
Chinese Internet company is a wartime company. Here's an example of a normal
workflow. One day I was having dinner with a few other Baidu people, who had a
question about HR. So I sent a text message to one of the HR leads at 7:00 P.M., while
we're having dinner. Over the next half hour, she sent text messages to all of her direct
reports at 7:00 P.M. They all collected answers, sent them all back to her and she got
back to me by 7:30. And this is a normal flow of work.

I would have been worried if she had taken more than an hour to get back to me. And
this is just how Chinese Internet companies work. People do give up significant personal
sacrifices for work. Maybe unfortunately to a lot of employees in China, your ability to get
a raise—that really changes your life. And so people are hungry, and people work really
hard, and people are very ambitious.

HOFFMAN​: Scale favors the swift—and you can find few startup scenes as fast-moving as
China’s. But I would argue that the greatest asset to China’s tech scene is not just the speed by
which massive companies have taken over the market—it’s the talent that now resides in those
companies. The executives, programmers, designers, marketers who know how to scale a team
from a few founders to several thousand employees. They form a critical mass that can scale
the next generation of promising startups at blistering speeds. And perhaps the surest proof that
this whole process is self-sustaining is that Linda has yet to launch an entrepreneurial network
in China. I asked her why. The short answer: no one has asked.

ROTTENBERG​: Our model has always been we are pulled into countries, we do not
push our model elsewhere. So we would need someone like Jack Ma and a group of
 other people that want to promote entrepreneurship to say, “Hey, we need Endeavor
here.”

HOFFMAN​: I have a prediction, no one in China is going to ask Linda for help anytime soon,
because China is already on a self-sustaining path.

And so where does that leave our other contenders? Should they abandon all hope? Not for a
second. Here’s what I find so encouraging about Linda’s work—the lessons learned from one
city can be telegraphed to just about any other city. What works in Buenos Aires or Istanbul may
work for struggling cities here in the U.S. as well. Linda herself never imagined Endeavor would
be of any use to American entrepreneurs. But lately, she’s been re-thinking that assumption.

ROTTENBERG​: I used to think, so what if you move to Silicon Valley? So what if you
move to New York? It’s still the United States; it’s different than taking a Brazilian or
Tunisian entrepreneur and moving them here. And in fact, actually it’s not—that's what
I’ve learned. If you're in the heartland of the U.S., moving to the coast is just as draining
to the local community as if you were from another country—and we have to create
homegrown, city-based entrepreneurship outside the coasts.

HOFFMAN​: You’ll recall, though, that Endeavor works on a pull model. And several U.S. cities
were clamoring for an Endeavor-like program to jumpstart their startup sector.

ROTTENBERG​: So now we’re in four U.S. cities—Miami, Detroit, Louisville, and Atlanta.
And it was interesting—in Atlanta, the co-chairs are two entrepreneurs that created
billion-dollar companies. They said, “We did not raise a dime here in Atlanta.” And they
said, “We're here to prove that the next generation is going to have people who will
invest in them to stay.”

HOFFMAN​: Endeavor isn’t just forming connections between entrepreneurs, but connections
between entrepreneurial hubs around the world. Successful entrepreneurs in emerging markets
can now come to Kentucky and say, “Surely, you can scale a startup here, too.” This isn’t
theoretical. It’s happening, right now.

ROTTENBERG​: We had a food and beverage tour, we have a lot of F&B companies in
Louisville. We brought F&B companies from Saudi Arabia and South Africa and
Indonesia and Colombia to Louisville—and they all connected. And I think in this
world—where we’re talking about the red state and the blue state, and people who are
pro- versus anti-globalism, and pro- versus anti-technology—I actually have come to
believe that if we don't do more to promote homegrown entrepreneurship in many cities
throughout this country—the ones that are hurting, that feel like technology and
globalism and job creation is passing them by—we're going to be in even more trouble.

So in fact, now I want to double down. I actually think Endeavor should be in probably 20
 cities in the U.S., whereas ask me five years ago, I was scratching my head why we
were in even one.

HOFFMAN​: So let’s stop worrying about where the next Silicon Valley might take root. It’s a far
less interesting question then how many Silicon Valleys can take root. How can we kickstart an
international ecosystem where entrepreneurs scale fast, pay it forward, and enable a thousand
entrepreneurial hubs bloom? It starts with a change in our mindset—a willingness to get a little
bit corny and say, “The next Steve Jobs might be driving a cab in Buenos Aires, or launching a
startup in Louisville. They only need the courage and connections to stay put.”

I’m Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Mariam Naficy

REID HOFFMAN​:​ ​It’s 1998, at the height of the first dot-com boom. Silicon Valley is on fire.
Nothing bad can happen. My friend Mariam Naficy is CEO of a start-up called Eve and she ​had
to have the domain name Eve.com. Only problem? She has to convince the owner to sell it to
her. And she was facing a negotiation that I do not envy.

YOUNG GIRL​: Hello? Who is this?

MARIAM NAFICY​: It is a five-year-old girl, Eve Rogers.

YOUNG GIRL​:​ ​This is Eve.

NAFICY​: ...who gets on the phone. And so I think, "What on earth am I going to say to
this 5-year-old?" So I said, "Hello.”

YOUNG GIRL​: Hi.

NAFICY​: “Could I buy your domain name?" And she was just saying to me, "What? I
don't really understand."

YOUNG GIRL​: Um, what?

NAFICY: ​And I'm sure Eve's mom, on the other line, was laughing her head off. I mean,
"This is a great joke to play on this silly entrepreneur from California who's calling. I'm
just going to watch her be tortured by my five-year-old for a while."

HOFFMAN​: Mariam then turns this risky negotiation over to her lead investor, the legendary
start-up whisperer, Bill Gross.

NAFICY​:​ ​So he gets on the phone with her mom, and he negotiated the purchase. And it
was equity in the company, a board seat for her daughter—an observer board
seat—trips to Idealab to see Bill several times a year.

HOFFMAN​: You had a five year old observer on your board? [Laughing]

NAFICY​: Yes. She didn't actually show up for the board meetings, but she did
occasionally come by and visit. Disneyland, software, educational software—it was a
very large package that was negotiated.

HOFFMAN​:​ ​If you were going to call your younger self, how would you have handled this
negotiation differently?
 NAFICY​:​ ​I would probably throw in the Disneyland almost immediately, because now I
know what a five-year-old girl wants. I have a daughter. And I would have said, "How
many times a year do you want to go to Disneyland?”

HOFFMAN​: Once a year? Twice a year?

YOUNG GIRL​: Maybe about 100 times a year.

NAFICY​: Exactly.

HOFFMAN​: [Amused] $50,000 plus Disneyland trips may seem like ​crazy​ expenses. But in my
experience? ​Every​ successful founder has a story like that.

[​THEME MUSIC]

HOFFMAN​: I’m Reid Hoffman, partner at​ ​Greylock, co-founder of LinkedIn and your host. On
this episode, I’m going to make the case that, as an entrepreneur, you need to raise more
money than you think you need—and potentially a ​lot​ more. I’m going to prove that theory
through conversations with some of the smartest people I know.

So why should you raise more money than you think you need? One word: Disneyland. Mariam
Naficy did not imagine that she’d spend over $50,000 buying a domain name from a 5-year-old.
She certainly didn’t imagine she’d have to sweeten the deal with tickets to Disneyland. But that’s
life as an entrepreneur.

If you look at a typical start-up’s budget, and sort the line items by sheer strangeness, how
many expenditures would fall outside the limits of your imagination? More than you’d think. So
you have to plan, paradoxically, for the unknown. And that’s the ​first​ reason you should raise
more money than you think you need.

But there are more reasons. And you’ll hear them in the story of my friend Mariam Naficy.
Mariam has weathered booms and busts. She’s one of those rare entrepreneurs who
succeeded through the first dot-com boom ​and​ the second internet wave. Her story is a pretty
convincing case for grabbing as much capital as you can, while you can.

We’ll start with her first company, Eve.com, which back then sold cosmetics online. It was the
height of the dotcom boom.

NAFICY​: I opened my doors at Eve.com, and we had literally orders coming in that very
day. We’re sitting there watching orders pile in for cosmetics—and all kinds of cosmetics
that we didn't think we would sell online, like color cosmetics, things that you think you
might have to try on. Success immediately. Immediate success at 28. We were able to
 raise $26 million dollars in the first year. So we did a very fast scaling of the company—I
think we went from zero to 120 people in six months. I think we'd hired the entire—what
they call "C-suite" of executives—within six months. Can you believe it? It was like an
entire executive team—poof, overnight in six months.

HOFFMAN​:​ ​So when Miriam was describing her instant exec team I had three emotions all in
one bundle: panic, calm and acceptance. Panic from the viewpoint of “Oh my gosh, that's going
to be a train wreck.” Calm because in the early days at LinkedIn, I did something similar. But of
course I did that with all people I knew. And then acceptance because the classic part of the
entrepreneurial journey here is being in permanent beta…You have to be always a work in
progress and training.

And in 1998, everyone was a work in progress. Most Silicon Valley start-ups were spending and
hiring at a blistering pace. Mariam did exactly what any sensible entrepreneur would have done:
She raised as much money as she could, and she moved fast. She went all in.

NAFICY​: I think the thing was that the market was so heated, and so many VCs were
backing competitors in this space, that I had to raise. It was good that we raised that
much, and got out ahead of everyone, because we ended up in the number-one spot.
And five venture-backed beauty companies launched in after us. We were running TV
ads. It was a complete land grab.

HOFFMAN​:​ ​Mariam called it a land grab, and she was right. Everyone used that
language—land grab and even gold rush. And in that kind of heated market, you ​have​ to raise a
lot of money. Because your competitors are raising a lot of money. After all, you’re trying to win.

It’s easy to err on the side of caution—to raise less and to spend less. But there’s a potential
mortal risk in being conservative. You might think you’re best serving your investors by being as
efficient with capital as possible, but that’s actually not true. You reward your investors by
creating a successful company. And raising ​only​ $20M might mean ​losing​ the $20M if your
competitors out-spend you.

Now Mariam raised $26 million, and it kept her one step ahead of her competitors. If she could
have raised even more, she would have.

But is there such a thing as raising ​too much money​? Personally, I don’t think so. But let’s hear
from someone who does. My friend Selina Tobaccowala co-founded Evite—an online invitations
service—around the same time that Mariam founded Eve.com. Selina went on to serve as
president of SurveyMonkey and is now co-founder of a new start-up, Gixo. I asked her to reflect
on the money she raised for Evite.

SELINA TOBACCOWALA​: We took ​way​ too much capital. We took 37 million dollars in
the end for online invitations. It sounds crazy, it ​was​ crazy. At the time, it was all about:
 Get the eyeballs. Put a billboard on [Highway] 101. Spend the capital. Hire, hire. The
thing I’ve learned was: Make sure you have a strong business, and then scale it out.
Make sure you have the right unit economics, make sure you have the right
fundamentals. And there was no reason we should have taken so much capital.

HOFFMAN​:​ ​Selina looks back on the 37 million and says “Wow, that was kind of crazy.” And it
does​ seem crazy. But that’s the market you’re in. You have to play to win. Just as your
competitors are playing to beat you, ​you​ have to be the last person standing. The truth is, $37
million in Silicon Valley seems kind of average—or even on the low side—today. The amount of
capital going in to these companies has been growing. It’s worth the risk, because if you
succeed, you create something spectacular.

And Mariam is in full pursuit of the spectacular at Eve.com in 1999.

NAFICY​: Working until ten o’clock every night, seven days a week.

HOFFMAN​:​ ​She’s flush with capital—having raised more than she thought she needed at the
time. And then… the bubble burst. And this was a very dramatic moment for those of us who
lived through it in Silicon Valley. Companies were going under every day.

​ here was this website devoted to covering businesses that are failing. I won’t
NAFICY​:​ T
say the name of it.

HOFFMAN​:​ I​ think we can—although maybe they’ll edit it out—which is obviously

Fucked Company.

​ o everybody is looking at it every day, and the Wall Street Journal's reporting,
NAFICY​:​ S
and The New York Times. So it looks like the world—from a young 29-year-old’s
perspective—your whole world is basically imploding, and the internet is over, basically.

HOFFMAN​: “The internet is over.” It may sound like a punchline. But, back then, people really
believed it. And the right response was actually, “No no, the internet is huge. It’s still coming.
This is actually precisely the time to bet on a dotcom company.”

I was personally lucky, because I was an executive at PayPal, and we survived—and in fact
thrived—through the dot-com crash. But I also read Fucked Company. I knew the entrepreneurs
splayed across its pages. And those stories have a funny way of sticking with you. As for
Mariam, she sold her company just in the nick of time.

NAFICY​: I get my investors whole—they've all made money, basically. I've made money.
I, at this point, am feeling a sense of relief-slash-exhaustion at the the whole roller
coaster I've been on. So I think at this point, I really wanted to get away and exit, and
just leave San Francisco for a little bit.
​HOFFMAN​:​ ​And on top of the exhaustion, there were unexpected consequences.

​ e worked really hard on Eve.com, and we made the right ultimate decision at
NAFICY​:​ W
the exact right time, so that's good. But we were often called fortunate and lucky, which
we were. And then when the whole thing came crashing down, there was so much
resentment that had been—understandably—built up around these young entrepreneurs
who had so much money to spend, that there was a huge backlash from everyone. They
were like, "Thank goodness these people have been shown a lesson." And so you
basically went from being someone to being absolutely no one—and shunned—and it
was really humbling.

HOFFMAN​:​ W ​ as there a particular experience which suddenly represented that shift

from being in this kind of golden spotlight to being completely shunned?

​ ike a pariah?
NAFICY​:​ L

​ eah.
HOFFMAN​:​ Y

​ es. All the agencies that would call on us at Eve, that always wanted to get to
NAFICY​:​ Y
know you as a CEO, or make your friend or your acquaintance, and help you—they all
just basically overnight turned off, the relationship just turned off. And there was
absolutely no receptivity to anybody among the headhunting firms, for example. It was
very much the opposite of welcoming. And so that was really humbling.

HOFFMAN​: When Mariam was reflecting on her transition from being a Grand
Poo-Bah—somebody important—to being a deliberately ignored nobody, it made sense to me.
It’s a very human reaction to worry about how people look at you. But you can’t let this paralyze
you. When I consider investing in someone, I look for founders who will risk almost
everything— ​ including notably their reputations—in order to succeed. Mariam now runs the risk
of not risking enough.

NAFICY​: I saw a banker after this, who was much older than I was, and he was like,
“Your biggest problem in life from now on is that you are going to be too conservative. I
anoint you, therefore, your curse is that you will be forever too conservative.”

HOFFMAN​: This idea of the conservatism really stuck with me. A week later, I was thinking
about it in the car…

HOFFMAN:​ When Mariam was commenting on her own curse of conservatism—the

incentive being not to risk that and make it look like it was just a fluke or a mistake—it
made me kind of think about: Who are the people that I see who also end up playing that
way. Why do people risk it? Why do I risk it? A lot of people risk it because they’re still
 hungry, they have something to prove. A lot of people risk it because they’re just kind of
risk blind, they just don’t see risk. I can think of people in each of these categories.

HOFFMAN​: When it came time for Mariam to launch her second company, she didn’t want a lot
of risk. She wanted what’s known as a lifestyle business. The kind of business that’s predictable
and fairly safe, with a steady stream of revenue that supports a comfortable lifestyle for its
owners. No big risks. No crazy drama. At least that’s what she thought.

NAFICY​: This time I said to myself, "Let's not bring in all the VCs at the beginning—I
know what I'm doing this time." So I chose no co-founder this time, no VC this time. Let's
figure out how to build perhaps a sustainable lifestyle business, a cash flow
business—this is what I was thinking at the beginning.

HOFFMAN​: If Mariam and I had known each other when she started Minted I would have
actually told her: “Abandon that theory from the very beginning, because it's really not going to
work.” So-called lifestyle businesses are very stable and reliable. Technology companies just
don’t behave that way. They need to move super-fast. And they need to be able to constantly
correct and pivot. They need to be able to perform the twists and turns of fighter-plane combat.

Tech businesses absolutely need to raise more money than they think they’ll need. They’ll need
that capital for all of the unknown pivots, whether it’s new customer needs or competitive
attacks.

To show you this difference between lifestyle businesses and scale businesses, like tech, I
wanted to talk to the classic kind of entrepreneur—the kind I usually don’t get to work with. Like
Amos Kedmey. He’s the proud owner of the Wine and Cheese Place in St. Louis. And he
knows​ his business model. He also happens to be our producer’s Dad.

AMOS KEDMEY:​ Wine and Cheese Place.

DAN KEDMEY:​ Hi Dad.

AMOS KEDMEY:​ Hi Dan.

DAN KEDMEY:​ Are you ready for your big interview?

AMOS KEDMEY:​ Sure.

​ re you nervous?
DAN KEDMEY:​ [Laughter]​ A

AMOS KEDMEY: ​Are you kidding me?

DAN KEDMEY: ​So it’s just a simple math question. If you were to open another Wine
 and Cheese Place, how much would it cost?

AMOS KEDMEY:​ Roughly $400,000.

DAN KEDMEY: ​You don’t have to pull up a spreadsheet or anything?

AMOS KEDMEY: ​No, I’ve been in that game for so long I know pretty closely what it
takes. You have to understand that our type of business is pretty stable. It’s almost as
stable as supermarkets. The parameters are known. The risk is low. And that’s why
when you observe, you see that not too many supermarkets go under. They may be
more profitable or less profitable but they are not going under at the rate that someone
like say in the fashion business or in the software business.

DAN KEDMEY:​ So Silicon Valley is not the place for you.

AMOS KEDMEY:​ Silicon Valley is a wonderful place to live in. But I won’t put a nickel
there, because I don’t have the guts.

HOFFMAN​: Perhaps Silicon Valley has made me an adrenaline junkie but I actually kind of look
at certainty as somewhat boring. And that’s the sort of certainty Mariam is craving as she
launches what she thinks will be a lifestyle business. We’ll head down that winding path with her
in a moment. But first, note that Mariam’s life had changed between her first and second
company.

NAFICY​: I had become a mom in between. I'd had my son, and I was having my
daughter, when this lightning bolt struck. Being a mom and an entrepreneur the second
time was really difficult and challenging but I also felt like others people probably
anticipated it being too challenging. They do write you down a little bit, if you're a mom,
and you're pregnant, and you’re starting a company, versus if you're a young 28-year-old
entrepreneur starting a company. There's significantly different ways in which you're
treated as an entrepreneur raising capital.

​ hich is terrible. And you are the perfect example of why that's actually
HOFFMAN​:​ W
even a dumb idea, let alone an immoral idea.

NAFICY​: I think I got seriously discounted, despite the experience of having a successful
exit for people.

HOFFMAN​: I said this in the room, but I have to say it again: The idea of discounting
entrepreneurs who have families is ridiculous. Investors need to let go of it. Back to Mariam.

NAFICY​: My close friends and acquaintances knew that I was good. Now my angel
friends said, "We believe in you—screw it. We're giving you two-and-a-half million dollars
 to start Minted." So there was a significant upside from having delivered a successful
exit.

HOFFMAN​: And so, Mariam launched her new business, Minted, an online stationery
store—not so different from an upscale neighborhood card shop. She stocked up on cards from
brand-name companies. But Minted also included a daring little side experiment. Mariam invited
unknown artists to submit designs to an online competition. Anyone could participate. Anyone
could vote. The winners would then compete head-to-head with the heavyweight champs of the
card industry. And so, in 2008, Mariam was ready to release her slightly offbeat selection of
stationery to the world. Here’s what happened:

NAFICY​: I open the doors. There's not a sale for an entire month. Nobody wants the
branded stationery products that we'd spent most of our two-and-a-half million
launching—because again, being conservative, I'd said, "I know, I'll do an Eve.com, I'll
put all these brands online, sign them up exclusively.” We had exclusive distribution
rights. Nobody wanted to buy them at all.

Instead, the teeny-weeny assortment that I had sourced through this one competition I
had run, one transaction a week. Then the next week, there were two. We had sourced
60 designs through our competition, and I'd saved a tiny bit of money to build what I
really​ wanted to build.

Out of the two-and-a-half million, I probably spent like $100,000 on what really became
Minted. It was like this little side thing, and there was a programmer up in Oregon, and
he and I were working at night on building the first competition. And that is the only place
where we saw any sales movement.

HOFFMAN​: Mariam stumbled onto the power of crowdsourcing—the idea that ordinary people,
when they come together in large numbers, can do work once reserved only for experts.​ ​Etsy is
an example of this. Kickstarter as well. But at this point, in 2008, it wasn’t understood very well.
It was something Silicon Valley was just getting its head around.

NAFICY​: I realized that this crowdsourcing thing was way different, and I'd uncovered
something that was more of a massive social, cultural change going on in the US—and
maybe in the world—versus some small-business idea. Because what was happening,
that I didn't realize, was that who's considered a creative out there is actually changing a
lot right now, due to technology and exposure. And so people are emerging as creatives
who haven't gone to school. They haven't gone to design school, they haven't gone to
art school, and they're massively disrupting art and design right now. And there is a true
meritocracy that you can actually build and unleash.

HOFFMAN​: So her sensible, lifestyle business has nearly collapsed. There’s only a teeny sign
of life in a funky, little crowdsourced marketplace—a place where amateur designers sell cards
to adventurous shoppers. It’s new. It’s different. And aside from a trickle of sales, there’s almost
no​ ​evidence​ that it will work. There’s only one certainty at this point. Mariam needs money. A lot
more money.

NAFICY​: And we were about to shut the company down. I thought, "You know, I could
take whatever’s left of the capital, and just give it back to my friends." I cannot lose the
money of my friends—I was maniacal about that. “These are my friends, it's
terrible—100,000, 200,000 each—this is going to be really bad. I've got to give the
money back.” But then when I started seeing these little bits of sales, and my true lead
angel, he said, "I think that you need to save the company potentially by considering
venture capital." He's like, "I think you should potentially consider a raise." And I started
seeing signs of life too. So I said, "I can save this company, and I can get the money
back to my investors. I should do that—reputation is everything. I want to do this."

HOFFMAN​: So the venture raise was primarily triggered by “I have to make sure I
deliver to the angels.”

HOFFMAN​: So basically, the ​only​ reason Mariam did a round of financing was to pay her
friends back.

NAFICY​: Yes. I was very much driven by a feeling of obligation and loyalty to my friends.
And so I raised the venture [capital], thinking that I would then save the company and
then somehow deliver the money back—not because I really wanted to raise venture.

HOFFMAN​:​ ​Here, Mariam runs into another reason you need to raise more money than you
think you need: unexpected opportunities. Mariam’s plan to start a lifestyle business just didn’t
pan out. She didn’t have enough funding to cover her Plan B—or her “Plans B” as I like to say.
Opportunities may arise later than you hoped, and you want the capital to carry you in new
directions. So she reluctantly pitched her idea and secured another round of funding. And if that
weren’t risky enough, she’s about to encounter one more familiar source of uncertainty…a stock
market crash.

​ nd we raised our venture around two weeks before Lehman failed, because
NAFICY​:​ A
this investor of mine had said to me, "I feel something really bad is going to happen, you
should go raise." So we just went out in August—"Who's in town? Anybody? Is anyone
in town in August?" So we went and raised money, and closed it literally right before
Lehman [Brothers] failed.

[Sounds of various news reports, chronicling the stock market crash]

HOFFMAN​: Believe it or not, Mariam launched her wildly risky, experimental business idea into
the heart of the worst economic crisis since the Great Depression: the collapse of the U.S.
housing market in 2008. Suppose she had waited until, say, September to raise that money.
Lehman collapses, panic grips investors and no one in their right mind gives cash to a bold little
experiment in crowdsourcing. Like that, Minted closes for business. Which is another reason
you should always take money whenever and wherever you can get it. You know never know
when it will dry up. As it is, Mariam did raise the money. And she still has to create a thriving
company. So first, she has to figure out what her customers really want.

I want to take you into the heart of Mariam’s grand experiment. When you’re launching a truly
disruptive business, questions don’t lead to answers. They lead to still more questions.
Questions you hadn’t even thought to ask. You put a product in front of a customer. Their
reaction surprises you. You go back to the drawing board and return with an improved product.
Your customers surprise you again. It’s a bit like a mad scientist desperately trying to prove a
hypothesis, and running up the budget in the lab.

NAFICY​: So I do a lot of my own focus groups myself with customers—I moderate them,
I write the scripts still. I love to talk to consumers. And I do that many, many times a
year. People are really shocked when they come in for a focus group, and the CEO is
moderating. But I love it, because I'm listening very carefully to find little, tiny nuggets of
insight that I love collecting.

HOFFMAN​: Is there one particular nugget from one of those focus groups that comes to
mind?

NAFICY​: Oh god, there are so many. Making prices all equal for different kinds of paper,
and realizing the analysis/paralysis people went through. You almost had to give them a
reason to make a decision, just by changing the price. That was just fascinating. I
realized, for example, talking to people who buy art, that it really depends, their art
decisions depend a lot on whether they buy a home, or which home they're on,
frankly—are they on the first home, second home?

You know, the gen-Xers were telling us, when we started the company, they didn't care
who made the design. Flash-forward five years later, the people are like, "Why aren't you
telling the story more? I need to hear about these artists." What's going on here? We're
in the middle of a cultural shift.

Millennial men like to be involved in the wedding decision with the millennial woman.
There are more involved dads, and they're more involved husbands, actually, it turns
out. We learned that our designs were too feminine in wedding and you wouldn't
necessarily even know to ​ask​ that question.

HOFFMAN​: And that’s the problem with building a business that has no blueprint for success.
You have to anticipate false starts. You design cards for brides, and then realize grooms are the
ones buying. You give short shrift to the artist’s profiles, and then realize millennials want their
whole life story. Here’s the lesson: Your customers are always a bottomless well of surprises.
How do you budget for an experiment on this scale? Mariam has a simple rule of thumb.

NAFICY​: In those early years, when there was little access to capital, we had to be really
cash-conscious. Things are always more expensive than you think they are, and they're
always going take more time to prove out, and you're gonna need more optimizations,
and more loops to correct things than you think you will. That’s why we just say roughly
speaking at Minted, “Act like you’ve got half, because you've got to factor in all the
failures and all the optimizations that really kill great entrepreneurs and businesses all
the time.” We know so many people—both of us, probably—people who had good ideas,
were on the right track. They just ran out of runway.

HOFFMAN​: I want to point something out here. Mariam was an investment banker. She can
crunch numbers and budget with the best of them. But her rule of thumb, spend half, is not quite
an exact science. Will twice as much money keep the experiment going? Why not three times
as much? Why is it so hard to accurately predict costs? In fact, there’s an academic term for
this.

DANIEL KAHNEMAN​: It's called a planning fallacy.

HOFFMAN​: That’s Daniel Kahneman, genius Nobel Prize winner and one of the leading experts
in our budgetary blind spots. We asked him why this so-called “planning fallacy” exists, and
what it means for different kinds of entrepreneurs.

KAHNEMAN​: The planning fallacy is that you have a plan and then you get the
resources that are needed for the plan with a little bit of margin of safety. But most plans
fail.​ They fail dramatically. The way to overcome it, in part, is that, and it's implemented
by the way, there is something that, actually I invented it, and I call it the “outside view.”
When you have a problem you look at the range of similar problems and you look at the
statistics of what happens. In particular you can look at the statistics of overruns and
they're different for different types of projects. So familiar projects like building another
house or things like that, the overruns are small, by and large. But the more unfamiliar
the project is, the bigger the overruns on average.

HOFFMAN​: The kind of entrepreneurship that I pursue and, frankly is the kind of
entrepreneurship that Silicon Valley pursues almost always, is something new. Right. It's almost
always a new game. It may be a new game because the tech platforms are different. It may be
a new game because the competitive landscape has changed. It may be a new game because
there's an anticipation or fact of an opening up of a certain form of market demand or consumer
demand. So almost always you really have no clue. You're throwing darts at a dart board about
how it plays out. The jump into the unknown where you’re like, “Who knows,” is at least a certain
adrenaline rush that perhaps I'm over addicted to.

My own worry is that certain areas that I get too expert in I then become a bad investor because
I'm too aware of all of the landmines. For example, at Greylock, because of PayPal, I’m the
payments guy. I haven't really done a payment investment yet at Greylock because every time I
look at them I think back in terms of the literal huge landmine field that PayPal ran through and
go, “Oh my gosh. I'm aware that there's explosives all over the place,” and it makes me too
conservative for making bets that I otherwise should make because there are some great
payments companies out there—Stripe, Square, et cetera—that I talked to very early and
couldn't bring myself to lean in to do despite world class great entrepreneurs. Note to self,
mistake. I was going, “Oh my gosh. I know how bad this payments area is.” So that's my curse
is kind of a curse of knowledge versus a curse of conservatism which may lead to making bad
risk bets in some selected circumstances.

NAFICY: ​So I feel that I fail, and I still fail, every day, several times a day. It's just that
you hope that you have enough successes that outweigh the failure. It's completely
normal, and it's something that I think hopefully everybody could talk about.

HOFFMAN​: There’s an important postscript to Mariam’s story. She raised $89 million in venture
capital for Minted, which is now a 9-figure revenue company with 350 employees. They’ve
shipped products to 70 million households around the world since she founded the company.

By now you have the sense for my theory: Entrepreneurs need to raise A LOT more money than
they think they need. But every good theory has a ​counterpoint.​ For this, we’ll turn to my friend
Brian Chesky, the CEO and co-founder of Airbnb.

BRIAN CHESKY​: I think startups raise way too much money. The less money you raise,
the more control of the company you keep. But more importantly the more constraints
you create. They develop a scrappy culture. The scrappy culture requires you to build
more novel solutions, use fewer out-of-the-box software things and you end up just
building a scrappy, more frugal, more startup like environment. I would make sure that
you give away control grudgingly.

HOFFMAN​: So Brian would take my advice cautiously. But cautiously or not, there are a lot of
important reasons to raise ​more​ money than you think you need: to respond to unexpected
expenses, to outmaneuver the competition, to guard against economic downturns, and to take
advantage of opportunities that may unfold late in the game.

The only thing you can do is set aside the uncertainties and just know the failures will come.
Budget like you don’t know when they’ll stop. And each time you’re walloped by some
unexpected expenses, remind yourself: It’s normal.

I’m Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Marissa Mayer

ANNOUNCER: ​And now, it’s time for another exciting episode of… Captain Hoffman
and the Masters of Scale!

Episode One: Careless Whisker. Deep in his lair in an abandoned hyperloop, the
villainous Colonel Mediocrity surveys the results of his latest dastardly plan to rid the
world of innovation.

COLONEL MEDIOCRITY:​​ Yes! I’ve done it! I’ve lured the greatest minds of Silicon
Valley to my most evil venture yet. They thought they were joining a cutting edge
AI-focused 360-degree facing voice-recognizing self-driving disruptor-incubator. But in
fact, they are now all locked into working for… the world’s biggest cat meme generator!
Soon, mediocrity will reign across the valley! And no one can stop me, not even…
Captain Hoffman!

CAPTAIN HOFFMAN:​​ Yes, it is I, Captain Hoffman! Instigator of innovation, upholder of

originality, and advocate for inspiration. And I’m here to put an end to your nefarious
ways, Mediocrity. Once and for all!

COLONEL MEDIOCRITY:​​ Oh yeah? You and whose army?

CAPTAIN HOFFMAN:​​ Why, this army!

MASTERS OF SCALE ARMY: ​Masters unite!

CAPTAIN HOFFMAN:​​ Behold, the Masters of Scale!

COLONEL MEDIOCRITY:​​ Impossible! I made sure I sucked up all the talent from the
valley and locked it down here. No one could resist the golden handshake, generous
equity stake, and unlimited artisanal cupcake allowance.

CAPTAIN HOFFMAN:​​ That may be so. But you overlooked all the raw young talent out
there. But not me. I sought out the most promising students and molded them into the
heroes the world needs to defeat you. Surround him, Masters!

COLONEL MEDIOCRITY:​​ You may have won this round, Captain Hoffman. But now it’s
time to see just how special your Masters of Scale are. Guards, release cyborg Catzilla!

ANNOUNCER:​​ Will the Masters of Scale snatch victory from the claws of defeat? What
will Captain Hoffman’s next move be? And what will happen to all those artisanal
cupcakes after Colonel Mediocrity’s cat meme farm is liquidated? Find out next time in
another exciting installment of Captain Hoffman and the Masters of Scale!
 REID HOFFMAN: ​The adventures of Captain Hoffman and the Masters of Scale have
long since left the airwaves. But their story still holds important lessons. Because like a
band of superheroes, your company will have its own origin story. And you won't always
be able find the heroes you need. You may find that your competitors have tied up all the
star employees. And when that happens, you’ll have to mold your own superheroes and
turn them into an unstoppable force. I believe when you can’t find the right people to
help your company scale, you have to make them.

[THEME MUSIC]

HOFFMAN: ​I’m Reid Hoffman, founder of LinkedIn, investor at Greylock, and your host. And I
believe when you can’t find the right people to help your company scale, you have to make
them. Being in a rapidly-scaling company can feel like being the lead in your own superhero
saga. Each day pits you against new problems that feel like they need superhuman-levels of
endurance to overcome.

And there will come a point in your adventure when being a lone crusader just won’t cut it.
That’s when you need to enlist some help. But assembling a squad of fully-formed superheroes
with the precise skill sets you need may prove tricky. The solution: think like Professor Xavier of
the X-men: go forth and find young promising talent. Guide them in developing their powers and
form them into a close-knit squad who’ll always have each other’s backs. If you do it right, you’ll
create a formidable force. And their achievements will echo throughout your company and
beyond.

This is one of the untold stories about many companies that have changed the world. These
companies needed to hire for roles that had never existed before. They couldn’t always find the
people they needed — so they made them instead. And these people, in turn, made the
companies what they became. I wanted to talk to Marissa Mayer about this, because at Google
she created one of the company’s least-known secret weapons: the program that hired and
trained Google’s product managers. You may not have heard of the Associate Product Manager
program, but it’s one of Google’s crown jewels, alongside Search and Gmail. And I would argue
that it sits at the root of Google’s success.

Marissa herself is one of Silicon Valley's more famous names. She joined Google as employee
number 20 and their first female engineer. After 13 years at Google, she moved on to become
Yahoo's eighth – and final – CEO. Her time at Yahoo was controversial — and we’ll talk about
that. But we’re going to start at the beginning. Marissa was still a college student and Google
was one of a thousand teeny Silicon Valley startups competing for talent.

MARISSA MAYER:​​ Due to a long distance relationship and a bad bowl of pasta I was in
my dorm room on a Friday night. And I told myself, “If anyone else mails you about
another job, you just have to pick. You have 13 good offers, you just have to pick one.”
HOFFMAN: ​At just that moment, another email popped up on Marissa's screen. The subject line
was just three words: “Work at Google”.

MAYER:​​ It came in late on this Friday night, it said, "Work at Google" and I remember
looking down and being like, "This bowl of pasta is so bad, and I am so pathetic that I'm
here on a Friday night eating bad pasta."

HOFFMAN: ​Remember, this is 1999. The peak of the Dot Com bubble. Stanford grad students
were showered with offers from tech recruiters. Marissa assumed she was just being spammed.
She hit delete. Or at least, she meant to.

MAYER:​​ I accidentally hit the spacebar, which in my email reader program opened the
message. I looked back up, and it was open, and I realized it was actually an email from
Salar Kamangar, another early Googler, who said, "I've been talking to different
professors at Stanford about who I should be talking to that's graduating, your name
came up."

HOFFMAN: ​Salar Kamangar, the Googler who sent that email, was Google employee number
9, for those keeping count. He’s now senior vice president of YouTube. Now Marissa had
another offer. Fourteen to choose from. It’s the kind of problem most new grads wish they had.
How did she decide? Methodically. Marissa enlisted help from Andre Vanier, a fellow Stanford
student, who’s now a VP at Oath.

MAYER:​​ I went up to his apartment in San Francisco and said, "I've got all these offer
letters..." And we pulled all the different values for all of the different columns off of these
offer letters: salary, stock, where it was, career trajectory, promotion ability, happiness
quotients.

HOFFMAN: ​They drew up charts and plotted graphs. They buried their heads in the numbers.
After six hours churning data, Marissa looked up to see the sun had set. Her head was spinning.
And she felt no closer to a decision.

MAYER: ​Andre just loves working on problems like that, and he turned to me and said,
"This has been really fun. Thank you so much for involving me in this." I was like, "I
haven't made a decision, this hasn't been fun for me at all. I'm completely overwhelmed!”

So he’s like, “Go to bed, sleep on it, the first thing you think of tomorrow morning,
whether you can articulate it or not, that's the right decision." That is how I ultimately
picked Google. I went to sleep, I woke up the next morning, and I just wanted to work at
Google. For a lot of the reasons I could articulate and for a bunch of other reasons that
were harder to articulate. I felt like the smartest people were there and I felt really
 unprepared to try and do what they wanted to do overall as a company. They were really
ambitious. For all those reasons, I picked it.

HOFFMAN: ​Marissa is well-known for her intense use of data when she makes decisions.
Indeed, it has been the target of much criticism. But what people overlook is that she’s not
making choices based solely on the data she collects. Each table of data she builds is like a
diving board. The higher she builds it, the wider the view, and the bigger the splash when she
jumps. But whether she actually takes that dive or not? That’s still based on intuition.

MAYER: ​I like to be really data-driven, but I don't ignore the human instinct element of it.
For me, my process is, a lot of times, roll around in the data, get to know it and really
understand it really well, and then make a gut-based call, which is often supported by
data and a lot of hard-to-articulate factors as well.

HOFFMAN​​: Informed intuition, is actually, I think, a good way of making decisions.

MAYER​​: Totally, yes.

HOFFMAN: ​So Marissa took the plunge and became Google employee number 20. She soon
found herself working across a whole host of projects. She started looking to hire a systems
engineer to take some of the pressure off. But this being Google, the engineer would need a
nearly impossible, exotic range of skills. They’d need knowledge of artificial intelligence for
building out Google’s complex search algorithms. And they’d also need to know about design so
they could work on Google’s front end, the part that users saw. It wasn't an easy hire.

MAYER:​​ We actually had the job description up for four months and we failed to find
anyone. Interviewed a bunch of people, but frankly at that point, everyone else's start up
was more promising than Google. It was very hard to extract people from other
companies.

HOFFMAN: ​Marissa’s boss at the time was Google’s VP of Engineering Urs Hölzle. And Urs
realized he wasn’t going to find somebody with that rare combination of skills. So he decided to
make the right person. And he didn’t have to look far for his candidate. He told Marissa that she
was the person for the job.

MAYER: ​He said, "I looked at everyone's resumes and you have this thing in your
background about cognitive psychology, and how people learn and think. You're
probably our closest match, so I want you to start spending one day a week doing front
end stuff. You just need to make these decisions and start implementing them."

He was like, "I'm not putting you in this role for your artistic judgment or your design
background." My mother was an art teacher, but I don't have a lot of design in my
background. He was like, "Basically, get data."
HOFFMAN: ​Marissa was no designer. But she knew how to get data. And she knew the design
questions that were plaguing Google’s engineers.

MAYER: ​Why is this font gray? Why are we still using serifs? Why is this here? What
would happen if we added a bigger margin?

HOFFMAN: ​First, she researched all she could about design theory.

MAYER:​​ I went about reading everything I could about fonts. It turns out, for example,
sans serif fonts are more legible, serif fonts are more readable. You're like, what's the
difference?

HOFFMAN: ​Each methodical question led her further into uncovering the mysteries of effective
design.

MAYER:​​ It turns out legibility is the ability to recognize the single character. It turns out
without serifs in the way, you can actually spot read much faster. With serifs, they guide
your eye along the road, the text, so they're sort of meant to create a track that your eye
follows.

HOFFMAN: ​She then took her love of data and did what any coder would do: she hacked her
way into making design decisions. Famously, she would take this approach to extremes when
testing what color was best for enticing users to click on ad links.

Voice:​​ Aqua blue?

Chorus: ​Ewww!

Voice: ​Marine blue?

Chorus:​​ Yuck!

Voice:​​ Aqua marine blue?

Chorus: ​Hmm...

Voice: ​Aqua velveteen crushed lavender blue?

Chorus:​​ Whoopee!

HOFFMAN:​​ Clearly, we’re not talking here about Philippe Starck style design. This isn’t about
beauty or style, but cold, hard data-driven functionality. Marissa wasn’t asking what looked best.
She was asking what performed best. She became the kind of data-driven designer that Urs
had set out to find.

Marissa was quickly making huge leaps at Google. Along with setting Google’s design bible,
she was playing a lot of hard-to-categorize roles across the company. There were many small
teams, working on different products and features. And when it came time for them to go live,
they would turn to Marissa for help. This gave her a clear view of every product and every team
throughout the organized chaos of the entire company. She was also one of the few people who
knew how Google’s increasingly complicated systems worked.

MAYER:​​ We had enough home grown technology at Google, and it worked sufficiently
differently from other systems, that we needed somebody who could help them
understand: How do I push this into production? How do I take this live? How do I
actually launch it, make sure all the components are up and ready to go?

HOFFMAN: ​As Google grew, the company became more and more difficult for newcomers to
navigate. Their small teams could develop products quickly. But every person had a narrow
view. This structural challenge didn’t go unnoticed by Google co-founder Larry Page. He did a
tour of other more established companies to see how they were organized.

MAYER:​​ He was like, "All these companies, they kind of look like we do except they all
have this thing called product management, which we don't really have."

HOFFMAN: ​Larry soon realized that they actually did have product managers. They just didn’t
have a name for them yet.

MAYER: ​[He said] “But what we do have is we have Salar, Susan, and Marissa…”

HOFFMAN: ​That’s Salar Kamangar and Susan Wojcicki, who’s now CEO of YouTube.

MAYER:​​ “...who all tend to do things kind of all across the company. Their job titles don't
really fit what they do, so they're kind of our product managers.” And then they were like,
“Wait, you're a software engineer, but you're doing all this feature specification and
testing and helping people launch all of the procedural elements, working with marketing
and PR and everybody so they know this new thing is going to appear, customer care."
That is right in the sweet spot of product management. We just didn't know that that's
what we were really doing.

HOFFMAN: ​As the company grew increasingly complex, there was a new imperative: they
needed more of these product managers. People with minds nimble enough to cover any and
every aspect of Google’s rapidly-increasing range of products. And who could quickly achieve
the same impressive level of mastery that Marissa, Salar, and Susan commanded.
But how could they get them? It reminds me of that classic John Hughes film Weird Science.
You just need to tweak the tagline from “Two high school nerds attempt to create the perfect
woman, but she turns out to be much more than that...” to “A bunch of Silicon Valley nerds
attempt to create an army of product managers, but they turn out to be much more than that...”

VOICE 1: ​We don’t have enough product managers but maybe we can make some
ourselves using our computers!

VOICE 2:​​ But they wouldn’t be real, they’d just be two-dimensional simulations, unless…

VOICE 1:​​ Unless we hook up electrodes to the dolls and hope for a highly unlikely yet
convenient lightning strike to hit the computer. And a dash of improbable movie magic.

VOICE 2: ​Let’s get to work!

VOICE 1: ​We need them to be 50% coding whizz…

VOICE 2:​​ …50% genius…

VOICE 1:​​ …and 50% design guru…

COMPUTER VOICE:​​ Warning: overload.

VOICE 1 & VOICE 2:​​ It’s alive!

HOFFMAN: ​Synthesizing new humans was not yet an option — even at Google. And they were
struggling to find qualified candidates to hire. So Marissa decided to make more of these
people. It grew out of a bet with her manager, Jonathan Rosenberg.

MAYER:​​ "I wanna bet that I can hire new people right out of school and train them to be
great product managers at Google faster than you can hire the people you prefer who
are more experienced and senior."

HOFFMAN: ​Marissa was convinced she could hire smart people, and train them to be the
colleagues she was looking for. She was confident about it, because that's what she and Salar
had done. They had come to Google as coders and had become product managers.

MAYER:​​ I was like, "I'm gonna go to Stanford and MIT. I'm gonna look for well-trained
computer scientists who also understand how to apply technology. I'm gonna bring them
in, give them really big jobs because we have really big jobs here in the product
management group that aren't filled, and we'll just do what kind of happened to Salar
and me. Larry and Sergei, at times, just kind of yelled at us until we did what they
needed us to do and rose to the occasion. I'm hoping to do that with less yelling."
HOFFMAN: ​Marissa found her first APM hire: 22-year-old Brian Rakowski. Fresh out of college.
What project did Marissa choose to ease him in on? She gave him… the whole of Gmail.

MAYER:​​ We brought them in and gave them these huge jobs. They had to have been
some of the most stressed out bunches of 22- and 23-year-olds in the world.

HOFFMAN: ​Marissa named this trial by fire the Associate Product Manager program. From the
beginning, Google’s APM program was founded on the principle of exposing new product
managers not just to one product, but to many. At the core of the program was a yearly rotation
that moved the new product managers between different departments. Even if some of them
were reluctant at first.

MAYER: ​The APMs, they would always be like, "No, I don't want to rotate." I said, "Look,
Google is a really unique place because you can try three or four different formats of
product management in one place. You can do nascent products. You can do mature
products. You can do mobile. There were all these different types of product
management, and usually to get that breadth of experience, you'd have to change
companies, which is a far scarier move.” The nice thing for them is it gave them that
flexibility without taking the leap of changing jobs.

HOFFMAN: ​True to form, Marissa came up with an equation to illustrate the benefits.

MAYER:​​ I would basically say a rotation is anything that can suffice the Mad Lib: "I used
to do 'x' and now I'm going to do 'y' and by making this change, I'm going to learn 'z.'"
You can say things like, "I used to adwords, now I'm moving onto search. By making this
change, I'm going to learn the difference between having advertisers as my users versus
consumers as my users."

HOFFMAN: ​Now, there’s nothing new about role rotation itself. This kind of training program
reached its heyday in the 50s and 60s with companies like IBM and General Electric. These
emerging titans of industry needed new leaders to keep up with the unprecedented leaps in
scale and technology. They couldn’t hire the people they needed; so they had to make them
instead.

I wanted to get a sense of how programs like this work outside of tech. So I reached out to
Karen Kirkland, a VP at Nickelodeon. For the part 13 years, Karen has led the Nickelodeon
Writing Program. Under her leadership, the program become one of the leading training
grounds for TV writers. Its alumni can be found not just on Nickelodeon shows like Dora the
Explorer and Spongebob Squarepants but also on shows like Silicon Valley, Modern Family,
and Blackish.
 KAREN KIRKLAND: ​There are no shortage of TV writers out here in Hollywood. But you
know what there is a shortage of? Good TV writers. It's almost like finding that diamond
in the rough. You want to find somebody who has that "it" factor, who's super talented,
has a very unique perspective, and can bring that to the page.

The other thing is that the program offers an opportunity for a writer to get expertise in
the areas that he or she may not ever have been exposed to if not for the program.
Prime example, I had two writers come through the program this one particular year.
Didn't know one another. They became fast friends and realized that they had similar
creative voices. Then they became partners and ultimately they pitched to Nickelodeon a
live-action show. And we ended up not only buying it, but it ended up going to pilot and
then ultimately ended up going to series. And that show was the number one live-action
show for kids for two years running here at Nickelodeon, and that was Bella and the
Bulldogs.

When I think about that story, to me, that is the ultimate story. It's the ultimate return on
investment. It's exactly exemplary of what the program was meant to do. You're building
community. You're infusing the content with diverse voices. You are giving opportunity to
folks that wouldn't have had it otherwise. And then you're throwing that all back out to the
audience who gets to ultimately benefit from it.

Those same two writers that I talked about? They're now producers on The Flash. We
have writers on Silicon Valley. And we've had writers that have been on Modern Family,
and we have writers that are on Blackish. How does that me feel? Jubilant. It makes me
feel like a proud mama bear. I like to be able to share in that joy with them. I'm just
proud.

HOFFMAN: ​Google’s APM Program became a well-oiled machine that found smart young tech
generalists and made them into the product managers that Google needed. But the program
also had an unexpected benefit, one that proved equally important.

MAYER:​​ They formed this network and it’s seeing the connections between things. One
of the things we saw starting to happen at Google is that the APMs, because of that
network, could get done things that no one else could get done. They would be sitting
there in the room with our engineers, and the engineers would be like, "I need
machines."

The APM would be like, "How many do you need?" And they'd be like, "Four thousand?"
Then later that day, they would show up at the engineer's desk and say like, "I got 4,000
machines for you. These are the racks they're in. They'll be coming these days." And
they’d be like, "How did you do that?" Part of it was because we had an APM who was
the product manager on machine allocations. They basically started to form connections
between groups.
HOFFMAN: ​The APM program created a secret circulatory system through Google’s famously
decentralized management structure. Google had grown organically, with ideas and teams
sprouting from the bottom up, largely driven by engineers with big ideas. This kind of controlled
chaos is a great way to foster innovation. And our episode with Google’s former CEO Eric
Schmidt talked a lot about this.

But the downside of controlled chaos is that it’s difficult to scale. New teams and projects don’t
have strong connections to each other, or even to the management team. And without support,
projects die on the vine.

For Google, the APM program created an informal — but highly effective — network of support
throughout the organization, driven by personal ties among managers and teams. And this
secret circulation system allowed ideas to spread. It brought resources to new projects. And it
brought new thinking to existing projects.

MAYER: ​By going across disciplines, you actually get a much more holistic pattern, but it
also worked because you knew someone at YouTube, you knew somebody who was
working in social. You knew someone who was working in machine allocation or
infrastructure. They really started creating a really wonderful element of glue across the
organization.

HOFFMAN: ​When it comes to Google's crowning achievements, I believe the APM program sits
right up there with Gmail, Search, Maps, and AI. In the program’s first year, 2002, Marissa hired
eight APMs. By 2008, she was hiring 20 a year. To date, around 500 APMs have gone through
the program. Indeed, the list of APM alumni reads like a who’s who of overachievers in Silicon
Valley.

VOICE: ​Brian Rakowski, Android lead and head of APM

Si Shen, co-founder of Papaya Mobile

Jess Lee, co-founder of Polyvore

Bret Taylor, president of SalesForce

Jeff Bartelma, product Director at Dropbox

Justin Rosenstein, co-founder of Asana

Nick Baum, founder of Storyworth

Jini Kim, founder of Nuna

 Dan Siroker and Pete Kooman...

HOFFMAN:​​ These alumni of the APM program ultimately moved on to other companies in
Silicon Valley. And eventually, it was Marissa’s turn. In 2012, Marissa got the call from Yahoo.
Yahoo was looking for a turnaround CEO to reignite the company's fire. In the 1990s Yahoo
pioneered many of the online services we take for granted today. But it had failed to capitalize
on them again and again. The list of squandered opportunities reads like a Shakespearean
tragedy.

VOICE:​​ Alas, poor Yahoo, I knew ye well. Once so vibrant, thou dost now move like a
shadowy spectre through this mortal coil. Your twin crowns, Search and Mail, now worn
by Google. YahooTV eclipsed by YouTube. YahooBriefcase cast aside for Dropbox and
OneDrive. Yahoo Music is silent, while Spotify sings out loud. Flickr hath lagged greatly
behind Instagram. And the once-mighty Geocities has now crumbled and above its ruins
tower Squarespace and Wix.

HOFFMAN:​​ Yahoo had burned through four CEOs in five years. A full 25 percent of the staff
had quit in the past six months. So Marissa was taking on a nearly impossible situation. When
an entrepreneur takes on a turnaround, I often describe it as throwing yourself on a grenade.
But this was like throwing yourself on an entire truck of TNT. It’s not surprising, then, that
Marissa’s time at Yahoo was fraught with controversy. And we’ll get to that.

But I want to look here at what she did when she first arrived, because there’s a lot to learn
from. In this turnaround situation, Marissa couldn’t hire an entirely new team at scale. But she
could make the employees that she needed out of the ones she had.

HOFFMAN: ​Yahoo was obviously this super important company on the internet that had
gotten into trouble by a bunch of bad strategic and management choices and they were
desperately looking for reinvention and they called you and you went, "Okay, this is a
grenade I can jump on," right? What was your initial theory?

MAYER:​​ I just felt like the people at Yahoo just seemed like really good, fun, nice
people. Despite all the turmoil at the top, you could feel that. I think there's a bunch of
good people who really wanna make this company work and wanna make the world a
nicer place, a cozier place, and have fun doing it. That was really my hypothesis when I
went in.

I was blown away when I got there because there were so many people there with so
many ideas and so much energy to try and improve the company. It was really just
waiting for someone to come and really try and harness it.
HOFFMAN: ​But when Marissa arrived at Yahoo in July 2012, the energy and enthusiasm at the
company lay dormant, stifled by layers of bureaucracy and years of mismanagement.

MAYER:​​ I remember when I first got there, someone said, "Lady, I don't even know
where you're gonna start. There are thousands of things that are wrong with this place." I
was like, "That's really daunting. There's thousands of things to fix?"

HOFFMAN: ​But there were also signs that energy was bubbling beneath the surface.

MAYER: ​My first week at Yahoo, I made a point of going down to the cafeteria and just
hanging out for a long time. I was in the cafeteria and this guy came up and snapped his
hand on my tray. He was like, "Is it go-time?"

I was like, "Please don't leave. I've only been here for four days. We might do something
actually fun and cool." He was like, "No, I'm not talking about leaving. Is it go-time?
There's a whole bunch of us that have been here for like five, 10, 15 years, waiting for
the leadership and the board to figure itself out. Is it go-time? Can we actually run, do
stuff, build stuff?" I was like, "Yes. By all means, run, go, do. Don't let me stop you."

HOFFMAN: ​You might find this surprising. Many people saw Yahoo as the walking dead. But
even the most zombified of companies can still have employees with a flash of passion in their
eyes. Sure, a lot of the more ambitious people will have left. Those who remain — and
especially the ones who want to run and go and do — will feel stifled by the system that has
risen around them. And they will resent it. The best way to overcome this is to say: “Hey, all of
this stuff you’ve been putting up with for all these years? Well, I’m here to clear those things
away so you can focus on bringing your ideas to life.”

MAYER: ​Ultimately, as Eric Schmidt will always say, leadership is defense. He's like,
"Look, unfortunately as an executive, you don't get to write code. You don't get to design
things anymore. Your job is point the team in a direction and get everything else out of
the way. Help them run and do the best work that they can do, but you've gotta clear the
pathway."

HOFFMAN:​​ So Marissa started clearing the pathway at Yahoo…

MAYER:​​ I had this wonderful woman, Patricia Moll Kriese, who I just called The Red
Tape Machete. She sort of had jurisdiction anywhere in the company to go and talk to
the person who could make the decision to just blow that up, and just be like, "That
process doesn't make sense anymore. We're just gonna remove this. We're just gonna
do that."

HOFFMAN: ​Every successful program needs a name. Marissa called this one “PB and J.”
 MAYER:​​ We created something called “PB and J”: process, bureaucracies, and jams.
Basically, you could report process, bureaucracies, and jams that didn't make sense to
you. We wanted to come up with something that was kind of catchy and memorable and
an acronym. We were like, process, bureaucracy. I was like, "Well let's do jams."

Patricia did a company meeting every Friday called FYI and Patricia would use the
Peanut Butter Jelly Time song as her intro music when she would come up and talk
about the different changes and things that we were gonna make as a result of “PB and
J” that week.

HOFFMAN: ​Under “PB and J”, anyone in the company could suggest a problem for the Red
Tape Machete to take on, as long as they also proposed a solution for it.

MAYER: ​We basically came up with a really scalable wisdom of crowds, like solutions to
point us where the problems were. They were everything from like, we had a doorway on
the stairwell in Bangalore that would get locked. It would make everyone walk all the way
around the building to use the staircase on the other side. They were just like, "Can we
just unlock the stairwell?"

All of those types of things to just start making the company work better, but also really
empowered the people there, to make them feel like: “You need to be part of the
solution."

HOFFMAN: ​Notice how Marissa made employees part of the process. She could have cut
through bureaucracy from the top down, with edicts and pronouncements. But by engaging
employees in the process — by making them her partner in routing out bureaucracy — they
became part of the solution. And this can start the transition from a cynical and disengaged
team to a renewed and engaged one.

With the underbrush clearing out, Marissa wanted to encourage new ideas to flourish. Yahoo
wasn’t the fresh slate that Google had been. So, Marissa didn’t have the opportunity to seed the
primordial goop of a new company.

But what she could do was bring out the dormant ideas – and long-dormant passion – that could
turn the company around. She could take the employees she had and make them into the
idea-generating employees she needed. So she issued something she called the “CEO
Challenge,” asking anyone, anywhere in the company, to propose new ideas to build the
business.

MAYER:​​ If you could come up with an idea that could make $5 million dollars a year
extra, we had a really amazing prize. I think it was like $250,000 per team, or $50,000
per individual. I thought we'd get maybe two dozen ideas, maybe green light six of them,
get $20 or $30 million dollars of extra revenue.
 Instead, we got, I believe, 840 submissions of ideas from across the company. There
were a lot of really amazing ideas in there. I think in the end, we greenlit almost 200 of
them. We started seeing tens of millions of dollars of new revenue come through that.

HOFFMAN: ​The outpouring of new ideas at Yahoo led to new revenue on a very large scale.
Marissa’s efforts to make the employees she needed from the ones she already had allowed
her to gain ground. And there’s a lot that other leaders can take from that. But ultimately, she
ran out of time.

And this is where we hit a key limitation of my theory. Building people with the skills you need is
far easier at a smaller scale startup. The company culture is still being formed and you have a
longer timeline. It’s not impossible at a larger company – it’s absolutely worth pursuing. But you
have to keep your eye on the clock. With that, we’ve reached the end of our investigation into
this theory on making the employees you need when you can’t find them. But I want to take a
few minutes with Marissa as she reflects on her time at Yahoo.

I promised at the top of this episode we’d spend some time with Marissa talking about what
happened at Yahoo and where she believes things went wrong. But just in case I haven’t
already made this clear: Yahoo was a deeply troubled company when Marissa came on board.
Once a pioneer in search and email, Yahoo had been steadily losing users and relevance for
years. The company was treading water as its competitors raced by on jet-skis. For many of its
investors, the only real value they saw left in the company was the ownership stake it held in
two other companies, the Chinese internet giant Alibaba and Yahoo Japan.

At the start of Marissa’s tenure, Yahoo’s Alibaba investment was like a rocket pack that helped
Yahoo defy gravity. A sell-off of some of the Alibaba stock brought an influx of cash that could
be spent on the new ideas that were sprouting up. But that rocket pack also came with a short
fuse. And that fuse was lit when investors became eager to cash out the Alibaba holdings.
Marissa and her team ran out of time.

MAYER:​​ It's a little known fact, but for the last six quarters of Yahoo's existence prior to
the sale, not only did we beat the street, we beat plan. We were starting to grow areas.
We had almost $2 billion dollars of wholly new invented revenue inside the company in
five years. We had bankers saying, "Look, can we take that part of the company public?
The growth on that is unbelievable."

HOFFMAN: ​The new growth was awesome, but it wasn’t enough. Yahoo’s board was anxious
to cash in on the Alibaba holdings. The best way to do this would be to separate Yahoo from its
Alibaba investment. But new government rules were making this more difficult. The board —
including Marissa — voted to wind down this chapter of Yahoo’s existence. They sold the
Yahoo core assets to Verizon and kept the Alibaba holdings in a new company called Altababa.
 MAYER: ​There were times when I even talked about my investor base was like two cats
in a bag. I had one cat that was very interested in the internet and the operating
business and the other sort of cat who were very interested in the Asian assets and what
was going to happen with those. There really came a point where you have to let the two
cats out of the bag.

HOFFMAN: ​Marissa and her executive team came up with a plan that would please both groups
of investors. The core Yahoo business would remain an independent company and go public.
The Alibaba assets would be spun off as a separate company. But that first plan proved
problematic.

MAYER: ​We came up with a plan to do a tax-free spin off. Simultaneously, the
government decided to examine tax-free spin-offs. So that made some of our investors
very nervous about the outcomes there. Ultimately, we decided we should not pursue
that path, but instead should do what we would call the reverse spin, which was a sale of
the core business, essentially leaving the Asian assets behind, getting the operating
business and the Asian assets into two different entities. Basically, there came a point
where the Asian assets were so big and so much of a focus of our shareholders that it
really made sense to disentangle the two, which ultimately led to the sale process and
the sale to Verizon.

HOFFMAN: ​What would you have told yourself to do differently? If you said, "Okay, now
I ran the course. These are the things I would have done differently. These are the
questions I would have asked. This is how I would have approached it."

MAYER:​​ Sure. I think that my summary now is, I love Yahoo. I think it would have been
amazing to see it return to greatness and I think that there are some ways where we
could have ended up with the home run outcome. That said, it would have required
almost perfect timing. Nothing ever goes perfectly, especially with regard to timing. It's
funny because I can now look back and say, "Oh, I could see somewhere where there
was a really amazing outcome for the company, if just for these few decisions and
points."

At the same time, in real time, I'm not sure. With the benefit of hindsight, you can make
that observation. In real time, I'm not sure that you can. I think that the team that we had
at the end, both from the executives all the way down to the individual contributors – at
the end, we really had the right team.

HOFFMAN:​​ One of the things that I tracked as an outsider in this was that to really
succeed in a turnaround, you need enough time. You need time to have culture change,
whether you're generating the ideas from the very smart people in the company or
bringing in new ideas, you need to be able to collectively buy into those ideas and
organize around them. And so a timeframe is necessary.
 The weird thing is, it was like a fuel pack that came with a fuse. On one hand, it's like,
"We have all these resources to do stuff." On the other hand, it caused the fuse to
suddenly get very short as it appreciated. All of a sudden, your time frame was
completely shortened on you.

MAYER:​​ That's what I felt like. It felt almost like an hourglass. When the first sand starts
to go through it, it looks like it's never all gonna fall through, but at the end, it starts falling
through really precipitously. That's internally what it felt like. In the beginning, Alibaba
gave us the luxury of time, which we really needed. In the end, it really shortened that
time frame. I do think if we had, with that team, with that base of revenue, with our plan,
if we had had another year and we had ten quarters of beating plan, we really could
have gotten there.

In hindsight, and again hindsight is 20/20, I think it would have been helpful to continue
to pursue the spin. I'm optimistic that it would have been ultimately tax-free, though it
may have caused an overhang. That said, at that moment, it looked very tentative. I
understand why we made the decision we made. But I do think if we'd pursued that
original spin-off idea, it might have given us the year of time as an independent public
company to really find our footing and start to show that growth in the operating core.

HOFFMAN: ​Since leaving Yahoo, Marissa has set up Lumi Labs to work on new projects. Its
location is somewhere very familiar to both her and me: the original Google office.

MAYER:​​ It's funny because I now am back in the same office I started my career in so I
get to see it, live it every day. We're almost above the bike shop on University Avenue in
Palo Alto, so there's these funny stucco stairs…

HOFFMAN:​​ By the way, PayPal was in that same office, so I know which office you're
talking about.

HOFFMAN: ​And this same office grew one of the most important means of developing talent in
Silicon Valley.

MAYER:​​ I am really proud of the APM program because I do think the legacy has
touched so much of the industry overall. But to me, I don't want to take that achievement
away from the APMs themselves. They're such amazing individuals, I don't feel like I get
to claim credit for their achievements.

HOFFMAN:​​ I'm Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Mark Pincus

REID HOFFMAN:​​ "Good morning! Hello! How do you do? Top of the mornin' to you."

You might be wondering where I am, listeners. Well, I’m in New York City, a place you’ve
probably heard of. Maybe the more important question is ​when​ I am. I’m in 1890. December
1890 to be specific.

I’m right here on the corner of 57th street and 6th Avenue. Festive candles flicker in store
windows and gas lamps light the streets. It’s Christmas time, and chestnuts are roasting on
street carts. I can smell them – along with the horse manure and the factory smoke.

You might wonder what I’m doing here. Well, there’s a story unfolding here that I wanted to tell
you about: just a few blocks away, a well-to-do New Yorker — we’ll call him “John Smith” — is
flying down the steps of his townhouse on 57th street, and pushing his way through a throng of
carol singers to flag down a horse-drawn hansom cab. He jumps in, telling the driver to head
downtown. He’s desperate to get his 4-year-old daughter the latest must-have toy for Christmas.

It's the “Tickle Me Elmo” of its day: the world’s first talking doll, which recites nursery rhymes to
lull your child to sleep. It’s made possible by a revolutionary new audio technology developed
by the greatest entrepreneur of the age, Thomas Edison.

John speeds past 42nd street, where the Chrysler Building will pop up about 30 years later. His
cab clatters past the mansions of Fifth Avenue, the horses snorting steam into the chilly air.
Finally, he arrives at Schwarz Toy Bazaar in Union Square. He throws the driver his fare and
runs into the store — just in time to snatch one of the last talking dolls from the emptying
shelves.

Triumphant, he returns home, creeps upstairs, and tenderly places the new toy next to his
sleeping child. He turns the crank on the doll's back, eager to hear its sweet lullaby. But,
instead:

DOLL​​: Now I lay me down to sleep / I pray the Lord my soul to keep / If I should die
before I wake / I pray the Lord my soul to take. Amen.

HOFFMAN​​: Not surprisingly, the dolls were a flop. Edison pulled production after just six
months. But while he killed this particular idea, Edison persisted in his belief that sound
recording would be big. Just so long as it wasn't delivered via screeching terror dolls.

Edison went on to pioneer the phonograph, which paved the way for an entire new industry of
home audio entertainment. And every entrepreneur and inventor would be wise to follow his
lead.
I believe you have to be relentless about pursuing a big opportunity — and ruthless about killing
your own bad ideas along the way.

[THEME MUSIC]

HOFFMAN​​: I’m Reid Hoffman, founder of LinkedIn, investor at Greylock, and your host. And I
believe you have to be relentless about pursuing a big opportunity when you see it. But you also
have to be ruthless about killing your own bad ideas along the way. And this ruthless approach
is hard to develop. It's tough to twist the knife into a cherished idea, especially when you're just
starting out.

But experience will teach you that the true value of any individual idea lies in how close it gets
you to your ultimate goal. If it doesn't move the needle, you have to axe it quickly, and find a
better idea that propels you forward. And for that, you need a certain kind of mindset. One that
sounds like this:

MARK PINCUS​​: I'll try anything and I'll kill anything and I'll kill it quickly.

HOFFMAN: ​That's the voice of one of the most ruthless killers in Silicon Valley. He's not afraid
to kill his own ideas — or yours. And he does it incredibly quickly as he constantly strives to
grasp the opportunities he sees. Unlike real serial killers, as he’s only a killer of ideas, he's not a
household name. But you'll likely recognize his work. Here's a clue.

It's Mark Pincus, founder of the social game company Zynga. You probably know Zynga best
from its social games like Farmville, Mafia Wars, and Words with Friends — each of which drew
millions of players. They all succeeded because Mark molded Zynga not only into a game
company, but a well-honed killing machine that tests hundreds of ideas daily, and quickly kills
the ones that don't work so it can focus on the ones that do.

To witness Mark's genesis as an idea killer, we need to go back to 1996. Mark had recently sold
Freeloader, the company he co-founded with Sunil Paul. Now Mark and Sunil are outside a
Tower Records…

PINCUS: ​We would stand outside Tower Records. Remember Tower Records?

HOFFMAN:​​ … doing market research for a new idea.

PINCUS:​​ It was kind of like AOL meets a computer meets the Internet.

HOFFMAN​​: AOL ...Tower Records. This is sounding like quite the nostalgia trip. But Mark's
sights were set firmly on the future. He wanted to give consumers an all-in-one device that
would get them online with zero fuss.
 PINCUS:​​ I kept thinking the internet's too hard for consumers.

HOFFMAN:​​ This instinct had given rise to the idea Mark was now pitching to passersby outside
that Tower Records. Fast, frictionless internet access. Via a free computer. Who could say no?
As it turns out, everyone.

PINCUS:​​ What we learned was nobody wanted a free PC.

HOFFMAN:​​ You heard that right. People were flat-out turning down a free computer.

PINCUS: ​They basically didn't trust you. They were like, “I don't get why you'd give me a
free PC.” They didn't trust you.

HOFFMAN:​​ Mark convinced people he was no scam-artist, only to uncover a more basic issue
that was putting them off getting a new computer at all.

PINCUS:​​ The insight we had from that was that the number one thing stopping people
from ever going and getting a new PC was this fear of moving their software and the
idea of having to reinstall their kids’ games and everything else. I thought, huh, that's a
solvable problem.

HOFFMAN:​​ So Mark did something that has become the defining habit of his career. He
realized an idea wasn't working – in this case, the free all-in-one internet PC. And he killed it.
Stone. Cold. Dead. But he remained true to his gut feeling that there was a big opportunity to
give users a frictionless experience.

So he moved on to a new idea – creating a piece of software called Move It, which helped
people switch seamlessly to a new PC.

PINCUS:​​ Ultimately that led to my technical, brilliant co-founders building this core
technology that became the basis for Support.com.

HOFFMAN: ​Support.com became a pioneer in tech support and cloud services. It's still going
strong today. However, ahead of Mark lay a tough lesson that solidified his belief that you need
to be ruthless when it comes to cutting losing ideas. It happened at the startup he launched after
Support.com — the social network called Tribe.

PINCUS:​​ Tribe is an easy chapter. Painful, but easy chapter.

HOFFMAN:​​ Tribe was launched in 2003. It focused on bringing groups – or tribes – of people
together around specific interests. These could range from knitting to heavy metal.
 PINCUS:​​ I was intrigued by the idea of looking at a local social network and saying:
“What would it look like if the people on Craigslist had a picture, and a profile, and a
reputation?” I was in my early 30's and I thought, "Okay we're all living in these urban
tribes, let's codify that online. What would it look like if we could connect with our tribes
and then use those tribes to find apartments and jobs and couches and cars?"

HOFFMAN: ​While initially it wasn't aimed at any particular section of society, it became popular
with certain sub-cultures. The most famous of these were fans of Burning Man, the annual
gathering in Nevada's Black Rock desert.

But Tribe failed to make itself into something that would appeal to a more general audience.
You know, one that doesn't necessarily dig getting freaky in the desert.

PINCUS:​​ My girlfriend at the time was completely turned off by Tribe and when she was
there, got lots of unsolicited messages and interest and it freaked her out and she said,
“This isn't for me.” Sometimes you can get a focus group of one that's more powerful
than the rest of your data, and that one was probably it.

HOFFMAN:​​ But Mark ignored that minimalist focus group. And as he was unwilling to retool
Tribe for mainstream appeal, the network's fate was sealed.

PINCUS:​​ It's pretty amazing if you think about it that I started one of the first three social
networks in 2003 and I managed to fail. At a time when everything worked, I actually
managed to fail.

HOFFMAN: ​I think Mark is being too hard on himself. It's true that 2003 was a banner year for
social networks: MySpace, Tribe, LinkedIn, Hi5. Friendster the year before. Facebook the year
after. Of those, only half are still around today.

PINCUS: ​The lesson from Tribe that came resoundingly out for me and still stands out:
that as entrepreneurs, part of the journey that we're on is learning how to separate our
winning instincts from our losing ideas. I think as a rule of thumb if you're a good
entrepreneur you can assume that your instincts are right 95% percent of time and your
ideas might be right 25% percent of the time.

HOFFMAN: ​I'm not as certain as Mark when it comes to fixing percentages on things as hard to
pin down as instincts and ideas. But I do believe that being able to recognize a winning instinct
is an essential part of being an entrepreneur. And I certainly agree with Mark that you can
expect to see a very high mortality rate among your ideas, even if the instinct behind them is
right.
There's a group of people outside of Silicon Valley who live this credo every single time they go
to work. And they do it for a reward far greater than a billion dollar market cap. Their place of
work: the comedy club. Their reward: laughter.

We spoke to New York-based comic Matt Ruby, the incisive mind behind Vooza. Vooza is a
video comic strip that pokes fun at the startup world. It's been called the Spinal Tap of startups.
This pitch from one of their videos sounds true-to-life.

VOOZA SPEAKER 1: ​When we pitch Vooza we’re telling a story about our business.

SPEAKER 2: ​And that’s what you need to remember, that pitching is 10% success and
the other 90% is failure. And that’s what I remind myself all the time: it’s ok to fail. I am a
failure.

SPEAKER 1:​​ I mean, I tell him all the time what a failure he is.

SPEAKER 2:​​ And I appreciate that, thank you. You’re also a failure.

SPEAKER 1: ​Thank you.

SPEAKER 2​​: You’re welcome.

HOFFMAN: ​We started by asking Matt how he feels when he’s certain there’s something to a
joke idea, but it’s just not working out.

MATT RUBY:​​ I think the audience is wrong, but I'm also wrong because I haven't
delivered it in a way that's funny or that gets laughs. So, they're wrong and I'm not good
enough and that, to me, is a challenge to get better and make them realize they're
wrong. But this is also problematic and not helpful for me in most areas of my life.

HOFFMAN: ​To avoid this pitfall, Matt is constantly trying out new ideas, using his audience as
his barometer.

RUBY:​​ Something might not get a laugh, but you can feel in the room that you've hit on
something. You have an idea that might be captivating to people or provocative or has
them on the edge of their seat waiting to see where you're going with it. And then, even if
you didn't take them all the way to a punchline that delivered a laugh, you might be like,
"Oh, there's something here."

You kind of turn into a dog with a bone of like, "Okay I know there's something to this
idea, maybe I just need to go in a different direction or maybe there's a different
punchline or example or metaphor I could use to really get the idea across." Eventually
 you might hit on something and be like, "Yeah, it was worth the effort." And other times
you might be like, "Okay this is just a waste of time. I gotta move on."

HOFFMAN:​​ In the case of Tribe, Mark was pursuing three instincts that, separately, would
indeed turn out to be spot on. His instinct that real-name social networking would be huge was
borne out by Facebook; his belief in the power of smaller sub-community forums powered by
reputation found form in Reddit; while creating a better way to find jobs and showcase your
professional talents… why, that's LinkedIn. But his idea to pursue all of these instincts with one
product was wrong.

PINCUS: ​I persisted with one losing idea, which was: what if we mashed all these things
together? And I got a bunch of the components of that wrong and I stubbornly persisted
with it. I enabled anybody to connect with anybody and what I got wrong was that mass
market people did not feel comfortable sharing everything with strangers.

HOFFMAN: ​Mark needed to kill the extreme openness of Tribe if he wanted to attract more
mainstream users and take advantage of the big opportunity. But he could not bring himself to
deliver the killing blow.

PINCUS: ​The idea of Tribe wasn't right. And rather than failing fast so that you get a lot
of shots on goal, we stoically, stubbornly, heroically stuck to our one idea the entire time.

HOFFMAN: ​It was this bitter experience with Tribe that reawakened the killer in Mark.

PINCUS: ​Out of that, for me, came this mentality that I brought into Zynga of “I'm not
wedded to any idea whether it's mine, yours, someone else's.” I'll try anything and I'll kill
anything and I'll kill it quickly. And I'm not going to let killing an idea, kill a winning
instinct.

HOFFMAN:​​ His next company would bring together everything he had learned so far. But his
methods would be contentious. Because Mark would remain unflinchingly true to his new
guiding principle — if an idea didn't work, it would be sent straight to the chopping block. It was
the only way to stay relentlessly open to pursuing big opportunities.

And the new company stemmed from a big opportunity Mark saw in the social networks that
succeeded.

PINCUS:​​ I kept thinking, “Wow, these people are kind of hanging out with nothing to do.”
And one of my early instincts on social networks was this concept that people just
wanted to hang out there. It was like a bar or a club and people just wanted to be there
and they wanted more to do there.
HOFFMAN: ​There it is – another one of those nagging instincts that leads to a big opportunity.
This time, it's that people wanted more things to do together on social media. And here comes
the idea.

PINCUS:​​ And I thought games were kind of this, lost love affair that we had growing up.
Whether it was board games or video games. We couldn't play them as adults because
they required too much time and they required us to be in the same room with your
friends and family around a Scrabble board.

The leap of faith that I think I connected to at an instinctive level was, I believed that
there was a latent demand in all of us to play games. But there was just way too much
friction around it.

HOFFMAN: ​Like the internet back in 1996, gaming had too much friction for the average
consumer. You needed to know how to download the games. Maybe your computer needed a
graphics card. Or more memory. Or the right operating system.

PINCUS: ​The question was, to me, not whether or not people want to play games, but is
there a way to deliver games to people that is so low friction and easy that they trip over
it?

HOFFMAN:​​ Mark's instinct – that there was a huge untapped market of people who would play
games on social media, was the right idea at the right time. Facebook had just started to let
third-party developers build apps and games that people could run within their Facebook
accounts.

Zynga could use this ready-made delivery system to mainline games into a previously untapped
audience. Soon there were millions of people playing and sharing Zynga games. It was like an
exciting, mysterious carnival had just arrived in town, and there was a stampede of people
eager to get in to the action.

SPEAKER:​​ Please step right up, step right up one and all for the amazing, sensational
traveling Zynga arcade. Enter now to be astounded by our many attractions, guaranteed
to enthrall and delight even the most somber of sourpusses!

HOFFMAN:​​ Boom. Zynga went stratospheric. It also left the rest of the computer games
industry scrabbling in the dust. Or maybe should that be Words-With-Friending in the dust?

PINCUS: ​At the time, game companies would build an entire game and take even two
years and $15, $20 million dollars before they even know if anyone wanted it. And we
could come out with on the Web maybe only spend four weeks.
HOFFMAN:​​ Mark turned Zynga into not just a game company but an idea killing machine. For
every hit like FarmVille, Zynga Poker, and Words With Friends, there were countless others that
didn't make the cut. Sadly, we can only imagine what some of these titles may have been.

SPEAKER:​​ Please step right up for… Laundromat Baron...? Experience the thrill of
helping your friends clean their underwear. Er. Oh. Hm. Yo-yoing with Cats! Anyone?
Hello? Hello?

HOFFMAN: ​Actually, I can think of a few people who'd enjoy Yo-yoing With Cats.

Another advantage Zynga had over traditional game developers was that it could constantly
improve games that it had already released. Mark had an ingenious way of working out which
new features to pursue that I like to call guerilla testing – because it is sneaky, highly targeted,
and very effective.

PINCUS: ​We would, maybe in our poker game, put up five words promoting a new
feature or idea for poker or a new game and if people clicked on it we'd say, “Awesome,
this is coming soon, let us know if you want us to let you know.” And I generally said, "If
half of your audience clicks on it, you pretty much know it's an idea worth pursuing."

HOFFMAN: ​Mark's teams would guerilla test hundreds of ideas every day. They could be small,
like changing the color of a menu from green to blue. Or huge, like the selling of virtual in-game
items and perks, which would go on to form the basis of the company's revenue.

Those ideas that made it through this initial stage were then fleshed out into actual features.
They would become what Mark calls “Bold Beats”, something that got users really excited.

For an example of a “Bold Beat”, we're going to look at a game that has its roots in one of
Mark's deepest fantasies… broccoli.

PINCUS: ​I had a farm and ranch fantasy and I still do, and I pictured Pincus Valley
Ranch and we would create our own broccoli and it'd be super organic and served by
name by restaurants and I thought, "Okay, I don't have the time or space to go and
actually be a farmer, but it would be a fun hobby or fantasy to create a farm."

HOFFMAN:​​ The idea was FarmVille, one of Zynga's biggest hits. In it, players planted, nurtured,
and harvested crops on a small patch of land, which they could decorate with animals, hay
bales, and fences. Everyone could have their own version of Pincus Valley Ranch, broccoli not
included. The “Bold Beat” came about when an engineer made a seemingly tiny change…

PINCUS:​​ An engineer, one day, just hacked on the animals and made a cow move, and
we put it out, didn't really know if players would notice, what they would think about it,
and it lit up Twitter and the blogosphere.
HOFFMAN:​​ Animals that move. It’s a teeny idea that took just a few hours to code. But the
excitement that cow caused led to a whole range of new features. Animal breeding, horse
racing, chicken coops with hatching eggs.

PINCUS: ​It really was one of the perfect, classic examples for us of a successful “Bold
Beat.” And if a “Bold Beat” is right, it could lead to inspiring your players to really imagine
a new dimension that that game play can go to and inspire you to play for another three
months or another year.

HOFFMAN: ​Mark had shown his teams how to quickly work out which ideas to focus on, and
which ones to terminate. The beauty of this is twofold. One: the idea lives or dies by the
customer reaction, which you can see immediately. And two: the scope of a new idea is limited
so it won't break the product. You're being bold by constantly trying out new ideas, while risking
very little.

PINCUS: ​And we used to say when you delivered a “Bold Beat” or a great feature that
your players loved, it was like Christmas Day because when we turned it on, your
metrics would light up and blog posts or Twitter would light up and it was amazing
because you literally could watch your DAU…

HOFFMAN​​: DAU stands for daily active users, by the way.

PINCUS:​​ ...or revenue chart and you'd turn on this feature and it would just jump and
then stay there and it was a beautiful new way of doing business.

HOFFMAN: ​Every product team was geeking out with their guerilla testing, and watching with
glee when their metrics lit up. It was Christmas Day. Every day. But there was no standard way
to track and share all this hugely valuable data.

PINCUS: ​They were all doing their own version of these things and nothing was
standardized. Some were working better than others and some had kind of lost the
thread. And I said, “This isn't going to work. We're going to standardize. We're going to
pick one template, you can fight like hell for what you think is right. But then we're all
going to commit to it.” And people's heads spun around.

HOFFMAN:​​ Mark wanted to scale his rapid-kill approach. To do that, he had to make sure every
team could access the treasure trove of data — and interpret it the same way

What they needed was data standardization. It may not sound like the most exciting of subjects.
So we found the most exciting person we could to explain why it's vital.
Andrea Jones-Rooy is an analyst at FiveThirtyEight, the website founded by Nate Silver that
brings data to bear on news reporting. Andrea is also a circus fire performer. You heard that
right. Circus fire. You may be wondering what that means.

ANDREA JONES-ROOY:​​ It means I light something on fire and then I put it on my body
and everyone gets impressed that it doesn't hurt, even though it does, and then I eat it,
which means I put it in my mouth.

HOFFMAN: ​Ouch. Eating naked flame sounds painful. But not as painful as unstandardized
data. As Andrea will tell you….

JONES-ROOY:​​ If you don't standardize data you don't have data. You just have a huge
mess. The reason we put things in data is so that we can share it with a broader
audience.

HOFFMAN: ​That audience may be be your executive team. Or it could be the entire world. But if
your numbers aren't clear, no one will be able to interpret them.

JONES-ROOY​​: It's about making units compatible and then making sure that whoever is
receiving that information understands how you're measuring it.

HOFFMAN:​​ But Andrea has been burned in this respect too, despite her credentials as an
expert in the field. When she was a professor at New York University’s Shanghai campus, she
and her fellow professors tried out an experiment that completely backfired.

JONES-ROOY: ​When we got to NYU Shanghai we were very excited about pioneering a
brand new way of doing education. We came up with, what in retrospect was a terrible
idea, of coming up with a new grading system all our own. We abandoned the A through
F scale and we assigned a different scale.

The scale itself ended up being a bit ridiculous, which was the best score you could get
was “truly outstanding,” then “superior,” then “very good,” then “good,” then “needs
improvement.”

The students understandably freaked out because they were like, "What does it mean?"
If you get a very good, that sounds good, but if you map it to an A, B, C, D, F scale,
that's a C. Good is a D. You're just like, "These numbers don't go together." It caused all
kinds of confusion.

And then in the end it was a huge mess because you can't have transcripts floating
around that say things like "truly outstanding" on them when they're applying to grad
school or trying to get a job because everyone understandably would be like, "What
 does that mean?" We then had to convert it all back to A through F anyway. It was a
huge mistake.

HOFFMAN: ​This shows just how hard keeping a grasp on data can be. Standards are a slippery
subject, even for the experts. But the effort is worth it. Because once you get it right, you have a
powerful tool with which to accurately test your instincts and ideas. Which is exactly what Mark
wanted for his teams. So he ordered them to crunch their numbers in the same way.

PINCUS:​​ What we got though with the standardization was now the ability to see the
same metrics, the same tests and share information faster.

HOFFMAN:​​ They went from having a huge mess to a huge cache of valuable insights. They
could analyze what their players were doing down to the last click and understand exactly what
the players wanted. Teams could then share their hot new findings with every other team at
Zynga.

This was all good in theory, but with dozens of product teams testing hundreds of ideas every
day, there was an avalanche of data to deal with. So Mark made an unusual decision in hiring
talent for scale. He started hiring data engineers and analysts at an accelerating pace, at a
moment when most other game companies would be hiring product managers and game
developers. Zynga was betting the farm — actually the Farmville — that all this data would give
it a huge advantage over its competitors.

PINCUS: ​We were pushing it more than anybody because we went to tracking every
click and analyzing it at a time that they were using Google Analytics. And we were
investing so much and we had so many people on it that we kept getting called stupid,
that people said, “Zynga has 50 people and this company is doing the same thing with
10. Zynga has 300 people and this company is doing the same with 20 or 50...” because
we wanted to over-invest in knowing the data.

HOFFMAN: ​They weren't called stupid for long. This investment in data geeks meant Zynga
could work out exactly what features got their customers excited, and immediately act on these
findings. All at a speed that traditional game companies could barely comprehend.

PINCUS: ​One of the most gratifying things as a founder and entrepreneur is to see
people go after an idea that you would never have thought of in a way that delivers on
your vision.

HOFFMAN:​​ Any entrepreneur, no matter how smart, is only right part of the time. The antidote
to thinking you’re right when you’re not is data. This data may come from standing on the street
asking random people about an idea you've had — like Mark outside Tower records — or it may
come from hiring hundreds of data analysts.
As Zynga's user numbers soared, Mark never lost sight of how important it is to be willing to kill
ideas rapidly. But he was finding it challenging to maintain this winning approach while scaling.

So what was Mark's solution to this? How did he find a way that allowed him to scale rapidly
while maintaining that vital ability to test, analyze, and kill the ideas at a tremendous pace? True
to form, it was controversial. So controversial, for the first time in the history of Masters of Scale
we're going to have to bleep out a word. I'd better test my bleeper.

DOLL:​​ Now I lay me down…

HOFFMAN: ​Yikes! Wrong button. Let's try again.

BLEEPER:​​ Beep.

HOFFMAN:​​ Okay. All working. Here goes. Roll the tape.

PINCUS: ​One of my biggest lessons about scale was <beep> f*ck <beep> scale.

HOFFMAN:​​ Excuse me?

PINCUS:​​ (replay) <beep> F*ck <beep> scale.

HOFFMAN:​​ That's what I thought he said. Now, I'm known for my contrarian theories when it
comes to scale. But you might think that giving scale the middle finger is a bit far, even for me.
But hold on. Let's put this in context.

By <beep>f*ck<beep> scale, Mark's not saying don't scale your company. He’s saying don't
lose sight of your overarching goal – to delight your customers.

PINCUS:​​ What really matters to your customer is that they have an amazing experience.
They don't give a <beep>sh*t<beep> how it got there. You're at your favorite hamburger
joint. You want a great fresh burger. And if you find out that the owner of the company
was back there making it, you’re stoked, you don't care if he figured out how to scale.

HOFFMAN:​​ Mark wants to be intimately involved in what some people would classify as the
"small decisions" that affect user experience. Because Mark knows that it is these small
decisions that can have the biggest impact on customers. And he wants everyone in his
company to care to the same degree.

PINCUS: ​I want our teams to care about the product experience at the pixel level and I
want that to be apparent to our players because especially on mobile, every pixel
counts, every nanosecond that we take of your time counts and quality is delivered at
the pixel level.
HOFFMAN: ​Micromanage the things that really matter - the things that are going to excite
people and make them love your product. Instill that obsession across your entire company.
Make sure that you’re trying ideas and killing ideas in order to delight your customer.

With practice, killing your bad ideas will become second nature to you. And this ruthless killer
instinct will clear the path toward your big opportunity.

If you do these things — whether your product is a great burger or a game about building a
great burger restaurant empire — I guarantee your customers most certainly will give a
<beep>sh*t<beep>.

I'm Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Mark Zuckerberg

REID HOFFMAN: ​Mark Zuckerberg famously launched Facebook as an undergraduate student

at Harvard. But to understand the origins of his success, I’d suggest going back. Way back.

MARK ZUCKERBERG:​ When I was 10, 11, or 12 years old—I used to mostly build
games for myself. And I started off by making these terrible games—I made this game I
remember about a snowball fight, that I could play with my sisters, and I think the
graphics were literally stick figures. But I could get my sisters to play, because they'd
prefer playing the game than actually having a snowball fight outside where we grew up
in New York.

HOFFMAN: ​A lot of tech entrepreneurs tell stories about the basic games they built as a kid. But
what sets Mark apart is that his story just keeps going and going.

ZUCKERBERG: ​My dad was a dentist. Growing up, one of the neat things was that his
dental office was actually connected to our home. The dentists and hygienists needed to
share data on the patients. So I built a system where he could communicate with folks
across rooms, and can also can communicate with me and my sisters upstairs—and I
called it ZuckNet.

REID: ​Um, guys, could you hold that effect until we get to Facebook?

ZUCKERBERG: ​Because it was basically our little network, inside the Zuckerberg home,
and it was fun. Basically, that was the predecessor to probably a bunch of different social
software ideas that I explored over time, but very early on, very early on. And then, of
course, AOL Instant Messenger came, and then everyone just used that.

HOFFMAN:​ Notice that ZuckNet actually beat AOL to market. As a teenage hacker, he was
already moving faster than the industry giants. He didn’t care if his product was perfect; he just
wanted to get it out there. And I actually wish more entrepreneurs had the same carefree spirit
of a teenage Mark. Because when it comes to launching a product, imperfect is perfect.

[THEME MUSIC]

HOFFMAN:​ I’m Reid Hoffman, co-founder of LinkedIn and partner at Greylock. On this episode,
I’m going to make the case for embarrassing yourself as an entrepreneur. In fact, if you’re ​not
embarrassed by your first product release, you’ve released it too late.

Why? Because your assumptions about what your users want are never exactly right. You need
to test a real product with real customers as soon as possible—basically the moment you have
a ​bare bones​ version. It’s the fastest way to build something users can’t resist.
Show your work early. Show it often. And above all, don’t hole up in your garage and try to
perfect your product on your own. You’ll be wasting your time. More fatally, you’ll be wasting
your opportunity.

If you’re Steve Jobs, you can wait for your product to be perfect. But there are almost ​no​ Steve
Jobs in the world. The way for ​most​ entrepreneurs to create a great product is through a tight
feedback loop with real customers using a real product. Don’t fear imperfections. They won’t
make or break your company. What ​will​ make or break you is ​speed​—how quickly you’ll build
things that users actually love.

03:28 My friend Mark Zuckerberg is the perfect person to talk to about this. He has no qualms
about rushing out an imperfect product. In fact, his famous mantra is “Move fast and break
things”—and I’d argue that it’s the foundation of Facebook’s success. If Mark cares about
anything, it’s making sure his team moves with the swiftness of a teen hacker, releasing
products that are anything but perfect, so their audience can improve them.

ZUCKERBERG:​ I think the strategy of Facebook is to learn as quickly as possible what

our community wants us to do—and that requires a culture that encourages people to try
things and test things and fail.

HOFFMAN: ​But how did he get Facebook’s 17,000-plus employees to shed their perfectionist
streaks? You’re about to find out. We’ll start Mark’s story when he was an undergraduate at
Harvard. By this time, he was in the habit of slapping together programs on the fly. He couldn’t
help himself.

ZUCKERBERG:​ I took this class, “Rome of Augustus.” And the final exam—they were
going to show some piece of art from the Augustan period in Rome, and you had to write
an essay on the historical significance. And I was actually coding the first version of
Facebook when I should have been studying for that, so a couple of days before the
exam, I was like, "Alright, I’m kind of screwed." This isn't something like math, where you
could just show up, and figure out how to do the problem on the exam. You actually
need to know the context of this, or else you can't write these essays.

HOFFMAN:​ Wait a second, rewind.

ZUCKERBERG:​ This isn't something like math, where you could just show up, and
figure out how to do the problem on the exam.

HOFFMAN: ​Who does that? In any case, with the exam fast approaching, you might expect
Mark to cut back on the coding. Instead, he doubled down on it.

ZUCKERBERG:​ I built this service where basically anyone in the class could go to it,
 and it showed you a random piece of art, and you could type in whatever context you
thought was important. And then after that, it would show you everything that everyone
else in the class had put in. So it was a study tool, but it kind of crowd-sourced exactly
what people needed to know for each piece of art. And the professor ended up telling
me after that, that the grades on the final were higher than they'd ever been before. And
I ended up passing that class.

HOFFMAN​: Imagine, for a moment, what would have happened if Mark was a little less hacker
and a little more perfectionist. What if he took his time to get the “Random Piece of Art” program
just-so? It might have looked nicer. It might have had more features. But he would have missed
the opportunity to put it in front of his classmates when they needed it, and more importantly,
would have missed the learning about ​how​ they used it.

But many of us—and I’m guessing most of Mark’s Harvard classmates—have a tough time
rushing things out. High-achieving people have a tendency to be perfectionists. And the same
instincts that make us good students, can make us lousy entrepreneurs. Susan Danziger has a
great analogy for why this is so hard. She’s the CEO of Ziggeo, a platform for recording and
embedding high quality videos online. And here’s how she thinks about the perfectionist
problem:

SUSAN DANZIGER:​ What you want to do as a startup is release the draft paper, the
one that you're sort of embarrassed for the teacher to read, the one that you would never
actually hand in. We have to deprogram ourselves so that we actually release things that
we are definitely, slightly embarrassed about.

HOFFMAN: ​Mark, as we’ve seen, is not the slightest bit embarrassed about releasing programs
he slung together on a moment’s notice. In fact, he relishes it. Most of his programs had a
pragmatic purpose—an urgent reason why people would give them a try—like a
fast-approaching final on ancient art. But many of his programs also served as social
experiments. He was always fascinated by what interested people. And what interested them?
Other people.

ZUCKERBERG:​ When I was getting started at Harvard, I was really interested in the
idea of how people could come together to create an understanding of things that they
couldn't do separately—so I built a lot of different tools in my time at Harvard. I built this
thing Coursematch—at the beginning of the term, you're trying to figure out what classes
you should take. And so basically, downloaded the course catalog, made something so
that you could say what courses you were interested in taking. And you could just click
through the classes, and it would say who is in them, and who is thinking of taking it. It
was all text, so it shouldn’t have been that fascinating, but people would just spend
hours browsing this.

People just have such a thirst for understanding what's going on with the people around
 them in their community—that even something as simple as just understanding context
around what courses someone is going to take, ended up being a really interesting
thing—much more than you'd think.

HOFFMAN:​ Notice how user reaction changed the way Mark thinks. It gives him a new lens on
what people want to do online. Their interest in the most mundane details of other people’s lives
consistently outstrips Mark’s expectations. What do you think about Augustan art? What
courses are you taking? Your peers want to know. And each time Mark hastily builds and
releases a new social tool, it added more evidence to a theory he’s held since childhood—the
internet changes the way we socialize.

ZUCKERBERG: ​I've always been very interested in how people communicate. I'm part
of the first generation of folks who really grew up with computers and the internet, and
that did shape a lot of my childhood, even beyond Zucknet. One of the interesting
formative memories that I have of using computers, and thinking about communicating
with computers, was I went to this school that was the next town over. So every day, I
would take a bus over this bridge to get to school. And at the end of the day, I'd take a
bus ride home, and all my friends would be on the other side of the bridge.

So in order to communicate with them—we didn’t all have cell phones back then, so I
was communicating on AOL Instant Messenger—and all the subtle signaling around
"away" messages, and the status updates that you'd have, and idle times—and all these
different things. So I grew up being very attuned to all the nuance, and the need for
people to control how they were communicating about themselves, and the signals that
they were sending, and the importance in how effectively you could communicate and
keep in touch with people—even if they were on the other side of a bridge—your whole
social community, every day when you went home. That definitely shaped a lot of my
philosophy on products that we've now built, around messaging especially, and how that
should work.

HOFFMAN: ​Mark kept building and testing tools for online communities. And the communities
kept springing up faster and rowdier than he had ever imagined. So he picked up the pace:
hacking and releasing, hacking and releasing. Among his coding projects, there was a photo
mash-up he created as a prank, and then—there was Facebook. As an aside, you’re about to
hear Mark make a passing reference to the the film “The Social Network”—or “the movie” as he
calls it. He considers it a work of pure fiction. With only one exception.

ZUCKERBERG:​ I'd done this prank Facemash, which was one of the only true things
covered in the movie. It was not really a predecessor to Facebook, any more than any of
these other things were. But it was this prank thing that I did—which was, OK, could you
produce this common understanding of who people at the school thought was the most
attractive? It's not something I'm very proud of now—it was not my best moment, and
pretty mean-spirited, and I wouldn't do it now. But it was another one of these tools.
 After I'd built a bunch of these things, I remember the Harvard Crimson was like, "How
could someone go build these things in a few days, yet it's going to take the student
government two years to build an online Facebook?" So I was like, "OK, that shouldn't
be the case. I can pull this stuff together, and make it so that there's a utility that people
can understand what's going on with all the students around them at their school—and
we can pull this together in a few weeks." So that was kind of the early thing. I wanted it
to exist at Harvard, and I was just really interested in this idea of how you could pull
communities together to produce collective understandings around things, and wanted to
use it for myself. So I built it at Harvard, and then kind of scaled it from there.

HOFFMAN: ​Mark didn’t invent the concept of a social network. He had well-established
competitors in the form of MySpace and Friendster. And he didn’t consider himself in their
league. It may sound hard to believe now, but Mark assumed Facebook would go the way of
Zucknet. Then, he was just a student hacking away at a student project...

HOFFMAN:​ You're building the first version of Facebook. You didn't obviously think at
that time: “This is a global social platform.” What was your first thought in building
Facebook?

ZUCKERBERG:​ I did think that someone was going to build a global social platform; I
just thought that there was no chance it was going to be us. It wasn't even like I thought
about it, and was like, "Oh maybe it'll be us, probably not." It wasn't even a question that
I asked—of course it wasn't going to be us. There are all these companies out there that
know how to build this stuff—and we weren’t a company. I figured that somewhere in the
world, people were doing the real thing, and I was just messing around in my computer
science classes. And I didn't realize until we actually got started with it, and kept going,
that, hey, this actually was the real thing, and you can keep on scaling it and growing.

HOFFMAN:​ I’ve heard this refrain, “I didn’t know it would be us,” time and time again. Success
has a funny way of sneaking up on the best entrepreneurs. They devote themselves to
understanding and serving a teeny cohort of users. They don’t always recognize that this
intimate link is precisely what enables their product to evolve for the mass market. That’s one
reason I encourage entrepreneurs to release a product earlier than they’d like. Release,
observe, react—over and over again.

It isn’t just about speed, and it certainly isn’t about sloppiness, but rather a precise dance
between Facebook’s tiny team and its growing user base. The users normally take the
lead—but not always. Sometimes Mark had to break the choreography and give the users a
twirl.

That’s because you have to discern what users actually want. And Mark received an early
education in the gap between what users say and what they do—particularly as he expanded
the social network to new campuses.
 ZUCKERBERG: ​We'd seen this funny dynamic where—we talked about how we started
it at Harvard, and then we'd launch at Yale, and then all the people at Harvard would be
like, "Oh, come on. Them?" And then it's at every step along the way. You go from Yale,
and you launch at Columbia, and the people at Yale are like, "Aw really? Those guys?"
We’re at Indiana University, and Indiana State launches, and the people at Indiana
University are like, "Come on." So we were used to this this dynamic of people assuming
that a change is like, "Why are you doing this?" but then coming around pretty quickly.

HOFFMAN: ​Notice the lesson Mark is learning here—he’s learning how to listen. Each college
said they didn’t want another college to join—and then, as each new college joined, the network
got stronger, and people liked it more. This is a great example of how entrepreneurs need to
both​ listen to what users say, and selectively ignore them. People can’t always accurately
predict their own tastes or even their own interests.

For example, a baseline for Facebook is: other people are going to upload pictures about you,
other people are going to tag them, and when those other people tag them, your friends are
going to see them, possibly before you. Do you want that product, yes or no? Most people,
described that way, would say “I don’t want that product! No, no, no! I don’t want that product.”
And yet everyone’s super happy with that product. People systemically are very poor at
predicting their own reactions to new things.

Even as Mark became a savvy forecaster of what users want from Facebook, he still didn’t think
he was building a business. At the end of his second year at Harvard, in 2004, he and his
co-founders left for summer break.

HOFFMAN:​ So what brought you to Silicon Valley?

ZUCKERBERG:​ I didn't mean to move out here. I'd been at Harvard for my freshman
year, and then the summer between freshman and sophomore year, and then
sophomore year is when I started Facebook. Dustin, my co-founder at Facebook, and I
wanted to get out of Cambridge for the summer, so we're like, "Alright, where should we
go to work on Facebook?" We're like, "Alright, let's go to Silicon Valley. That's this
mythical place where all these companies come from." And I remember we explicitly
talked about, one day, we might start a company—and this was after we'd started
Facebook.

So the clear implication was, one day we were going to create a company, but this was
obviously not the company that we were going to create. By the end of sophomore year,
I think there were about 28 or 30 schools that we had spread to, because literally people
were just writing in from schools, saying, "Hey, can we get this at our school?" So we
just ranked schools by how many requests we had for it, and then whenever we had
enough server capacity, we would just launch at the school that had the most requests
 to us about wanting it. And so we moved out here for the summer, expecting to go back
to school in the fall. We had our first round of investment that Peter Thiel led.

VOICE: ​Peter Thiel is the co-founder of PayPal and an early investor in Facebook.

ZUCKERBERG: ​And you participated in—so we're grateful for that, and I'm glad that
that worked out well for all of us. But I remember we told Peter, we're going to go back to
school in the fall. And he clearly just didn't believe us. So he was right, we were wrong.
Come fall, we realized that it was just too much work to scale up to hundreds of schools,
at that point, while doing a full course load. Harvard lets you take time off, so we’re just
like, "All right, we’ll take a term off." And then that kind of just continued.

HOFFMAN: ​ “Continued” is an understatement. To give you a sense of how quickly Facebook

took off, we asked Hall of Fame sportscaster and podcaster, Dick Stockton, to offer the
play-by-play of Facebook’s growth over the next few years.

DICK STOCKTON: ​It’s 2005, Facebook expands to 2,000 colleges.

They can’t get enough!

By 2006, Zuck turns down a billion-dollar buyout.

Later that year, the genius programmer gets a $15 billion offer. Deeee-nied!

2008. This hacker-turned-internet titan drafts Sheryl Sandberg.

One year later, Facebook is profitable! Zuck’s offense seems unbeatable.

By 2012, he takes Facebook public! I haven’t seen a run-and-gun team like this since
Doug Moe coached the Denver Nuggets.

By 2015, Facebook logs 1 billion active users.

What a ballgame!

HOFFMAN: ​If you’re a fan of Dick Stockton, you may be interested to know that he has a
podcast of his own. It’s called Stockton!, with an exclamation point.

Underlying all of Facebook’s early achievements was a consistent philosophy, practiced every
day by its employees—“Move fast and break things.” This mantra was plastered all over
Facebook’s headquarters. Its core belief is to release products early—when they can still
embarrass you—and iterate upon them quickly in response to what you learn from your
customers. Do users love it? Do they hate it? Worst of all: Do they ignore it?
Maybe the product breaks under certain conditions. Maybe it’s embraced by certain segments
of your community​, ​and rejected by others. Maybe they use it, but for a different purpose than
you were expecting. The only way to learn these lessons is with real users in real settings.

ZUCKERBERG:​ I think when you're building Internet software that you can change
every day, I think that there's really something to the strategy of just learn and go as
quickly as you can. Even if not every single release is perfect, I think you're going to end
up doing better over a year or two than you would be if you just waited to get feedback
for a year of all your ideas. So that's really core. I think more than any single product that
we're working on at this point, that focus on learning quickly is the strategy of the
company.

HOFFMAN: ​This philosophy was born in the tech industry, but plenty of leaders apply these
nontraditional methods to more traditional industries. Take Kara Goldin. She’s the Founder and
CEO of Hint Inc., a $90 million beverage company that sells water infused with fruit flavors.
Personally, I love the cucumber. Kara puts this idea into practice. We reached out to her to learn
how she thinks about releasing imperfect products—ones that people will drink. She starts off by
debunking the idea that your product has to be perfect.

KARA GOLDIN: ​ The number of entrepreneurs that I talked to that are in this holding
pattern because they think that something needs to be perfect prior to bringing it to
market is astonishing, frankly. If you're not OK with flying the plane as you're building it,
then if that really makes you uncomfortable, and you get frozen, and you really can't
move, then you're in trouble.

HOFFMAN: ​Kara made a bold decision not to add sugar or preservatives to her bottled drinks.
And at first, this meant the drinks went bad really quickly. But she still wanted to know if people
liked the flavor. So she started selling bottles of Hint even as she was scouring the world for
ingredients that might extend its shelf life.

GOLDIN: ​We were really watching our product carefully, and making sure that the taste
profile didn't change. And again, we knew that it only had a few weeks’ shelf life. We
were constantly watching it to make sure that it didn't, for example, grow mold—which in
a non-preserved product, could. So I always tell entrepreneurs, “If you don't think that
your product is perfect, but you think it's ​pretty​ good, and you want to actually figure out
if it's going to get some sort of reception—get it into some stores.” Just get it out there
and you can always improve it along the way.

HOFFMAN:​ It is important to distinguish between digital world and the physical world—or as we
like to say in Silicon Valley, the world of bits and the world of atoms. Because the world of bits is
much more malleable and easy to refactor. Atoms are much more expensive. But every
entrepreneur must walk this fine line between fixable and fatal. The important thing is that you
push your experimentation to the limit. For Mark and his growing team at Facebook, the mantra
of “move fast and break things” served as a rallying cry, and the philosophy made a lot of sense
when they were a fledgling startup. But when you have thousands of employees moving fast
and breaking things, someone has to clean up their messes. As Facebook grew, Mark became
aware of a growing tension between his hacker ethos—to move fast—and his responsibility as
CEO to avoid breaking things on such a massive scale. Thus a new mantra was born: “Move
fast…with stable infrastructure”

ZUCKERBERG:​ Well, it’s less catchy.

HOFFMAN: ​But the best mantras do more than just sound good. They give you the resolve to
make tough decisions.

ZUCKERBERG:​ So "move fast," I think, is interesting, because you actually have to be

willing to give something up to get it. And the question is, "What are you willing to give
up?" And early on, the trade was, "Move fast and break things." The idea was, we will
tolerate some amount of bugs and flaws in the service of moving faster and learning
what our community wants faster. But we got to a point where it was taking us more time
to go back and fix the bugs and issues that we were creating than the speed that we
were gaining by going faster.

So we're like, "OK, we need a new strategy to enable us to move fast." And what we
came up with was: we're going to do this by building the best infrastructure. So an
engineer who comes from any company is going to be able to ship their product faster
here—and test it better, and move faster, and all these things—at Facebook, than
anywhere else in the world. So that's what we mean by "Move fast with stable
infrastructure." But again, we don't get it for free—we invest a huge amount in building
infrastructure. So I think these values always come down to, what are you willing to give
up to get something? Because they're not free—nothing is.

HOFFMAN: ​Mark concedes that “Move fast with stable infrastructure” is a clunky mantra. It
doesn’t have the snappy appeal of “Move fast and break things,” but it adds guardrails to protect
the company in its new phase. You can still release something bold and half-baked. You can
still break things. Just don’t break the infrastructure. Because the infrastructure is too slow to
repair, and if you break the infrastructure, it will ultimately slow you down.

And with that new rule in mind, Mark laid the groundwork for mass experimentation on
Facebook. How does it work exactly? One thing you should know about Facebook: It has many
faces.

ZUCKERBERG: ​At any given point in time, there isn't just one version of Facebook
running, there are probably 10,000. Any engineer at the company can basically decide
that they want to test something. There are some rules on sensitive things, but in
general, an engineer can test something, and they can launch a version of Facebook not
 to the whole community, but maybe to 10,000 people or 50,000 people—whatever is
necessary to get a good test of an experience. And then, they get a readout of how that
affected all of the different metrics and things that we care about. How were people
connecting? How were people sharing? Do people have more friends in this version? Of
course, business metrics, like how does this cost the efficiency of running the service,
how much revenue are we making?

It can even kick off qualitative studies and ask people how happy they are with this
version. And then at the end of that, the engineer can come to their manager, and say,
"Hey, here's what I built, these are the results. Do we want to explore this further and do
this?" And giving people the tools to be able to go get that data without having to argue
whether their idea’s good through layers of management before testing something, frees
people up to move quicker. If the thing doesn't work, then we add that to our
documentation of all the lessons that we've learned over time. If it does work, then we
can incorporate those small changes into the base of what Facebook is—that now
everyone else who is trying to build an improvement, that's the new baseline that they
need to get against.

HOFFMAN: ​And here’s the thing. To really give your employees the freedom to experiment, you
have to get comfortable with embarrassment. I asked Sheryl Sandberg, Facebook’s Chief
Operating Officer, to tell the story of a legendary embarrassment that’s now part of company
lore.

SHERYL SANDBERG:​ So we have a very famous story at Facebook about a young

summer intern named Ben who wanted to help figure out how we could not take the site
down, and to understand how we can recover from bugs triggered. So he triggered the
bug, and took the site down for 30 minutes. You know, in our industry, that is crazy. He
got hired full-time, and they started calling what he did “Ben Testing.” We put things in
place so that you wouldn't take the site down, but it was the celebration of, “That was a
good idea—not well executed—but we still want to do those tests.” I think being pretty
open about where we make mistakes—Mark does it, I do it, I make mistakes all the time.

HOFFMAN: ​This willingness to hazard mistakes isn’t just liberating for Facebook’s employees. It
enables Mark to focus on the things that matter.

ZUCKERBERG:​ It creates this mode of running the company where what I do is I figure
out what the high-level directions I think we should go in are, who the best people are to
work on those things. But then on a day-to-day basis, a lot of the decisions that I'm
making are like, "OK, is this going to destroy the company?" Because if not, then let
them test it. If the cost of the test isn't going to be super high, then in general we're going
to learn a lot more by experimenting and by letting the teams go and explore the things
that they think are worth exploring than by having a heavy hand in that.
HOFFMAN: ​With that in mind, I want to amend my theory—I do believe that if you’re not
embarrassed by your first product release, you’ve released it too late. But I should add your
feeling of embarrassment won’t dissipate by the second build or the third. In fact, it will continue
even if you’ve scaled the product to more than one billion users. The most innovative products
should be a perpetual cause of embarrassment.

The word "embarrassment" plays a key role here. Over the years, some people have interpreted
my theory as permission to cut corners, act recklessly, or proceed without a clear plan.

But notice: I said “If you’re not ​embarrassed​ by your product.” I ​didn’​t say "If you're not ​indicted"​
or "If you're not ​deeply ashamed​ by your product." Indeed, if you launched so fast that your
product generates lawsuits, alienates users, or burns through capital without any apparent gain,
you did in fact launch too soon. Without doubt, there are risks that come with experimenting at
scale. With each new test, you run the risk of both embarrassment and failure—and no one is
really immune to a fear of failure. How does Mark Zuckerberg shed his fear? One word:
opportunity.

ZUCKERBERG:​ And this just gets down to something that I think is pretty personal for
me, which is, I'm much more motivated by making sure that we have the biggest impact
on the world than by building a business, or making sure we don't fail. I have more fear
in my life that we aren't going to maximize the opportunity that we have than that we
mess something up and the business goes badly.

HOFFMAN: ​The opportunity to build an enduring product far outweighs the costs of alienating a
few users along the way. And the sooner you internalize that tradeoff, the faster you’ll move
along the path to scale. So quit fussing. Take it from me. I’m about to wrap up this episode, right
about here, any second now. And If you don’t notice anything glaringly wrong with it, then our
producers clearly released it too late.

I’m Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Nancy Lublin

NANCY LUBLIN:​ I went to see Ibsen’s, A Doll's House, at the theater​.​ 10th row center
sitting to my left. Donald Trump. Sitting to his left some skinny blond I didn't recognize.
And he's eating Milk Duds, like shoving them in his mouth. Fistful at a time and I look at
him and I'm like, do you need to own the company or are those available in the lobby,
and he says all Haw-Haw grabs the box from the skinny woman him and hands them to
me because I don't think she's anything but tofu and water. And and so I eat the Milk
Duds and we strike up a conversation and he says so what do you do.

REID HOFFMAN: ​That’s Nancy Lublin. And what does she do? She builds non-profits the way
Donald Trump builds skyscrapers. Her organizations are huge, tremendous, big-league stuff.
Believe me.

When Nancy accidentally sat next to Trump in that theater, she had just launched her first
non-profit, Dress for Success. The organization started as a clothing drive to help women on
welfare dress for job interviews. She collected pantsuits, pearls, pumps. You name it, Nancy
had it piling up in her tiny apartment. She figured Trump might have a spare storage room
somewhere in his real estate empire. So she started pitching.

LUBLIN:​ I talk about Dress for Success and how amazing it is. And he says, “Oh really?
Do you enjoy it? And I was like, “Yes it's pretty amazing helping women like move from
welfare to work.” And he says, “Really it's not boring?” And I'm like, “No it's not boring.”
So I said to him, “So what do you do?” And he says, “No one ever asked me that
before.” And I said, “Well, what do you do? How would you describe it?” And he said, “I
guess I'm a builder. I build things.” And I said, “Oh, do you like it?” I mean like I gave it
right back to him.

HOFFMAN: ​They’re off to a rocky start. No matter. Nancy keeps pushing.

LUBLIN: ​I call a friend and say you got to give me the name of his personal assistant.
She says it's Norma Foerderer or who was famously his assistant for decades. I go to
Blockbuster — again this is a long time ago — And [buy?] like a giant box of Milk Duds
and I get in a cab and I say, take me to Trump Tower

Now I'm on the 26 floor and I look around it's all gold and glass and mirrors. Through the
gold and glass and mirrors I see the skinny blond from the night before the theater and I
waved my arms. She comes over. She's like, the woman from the theater. What are you
doing here? And I said look I will give him a box of Milk Duds a week for the rest of his
life if you can just find me like 500 square feet of space because everything's in my
apartment. She says he's broke. And look around. I'm like I see times are rough and I
shake her hand I say, OK well thank you so much.
HOFFMAN: ​You have to love this about Nancy: She doesn’t give up easily.

LUBLIN:​ Now again I'm an entrepreneur. I am bitten by that bug. I don't give up there.
So I'm doing like Fox breakfast TV the next week and I look over and the woman sitting
next to me and I recognize her and I say “Are you Liz Smith, the gossip columnist?” She
says, “I am.” I say you know I have a story you might be a interested in and I told the
story. And that Sunday she writes it up in The New York Post and it runs in her column
nationally and she tells it on TV. And so Monday morning I take that New York Post and I
go to Trump Tower and I say to security please tell Norma Foerderer that Nancy Lublin
is downstairs. And I go up and Norma Foerderer says it’s good to see you. We saw it he
saw. He thinks it's very funny but we have nothing for you.

So the ending of the story is I've got the most beautiful rejection letter I've ever seen in
my entire freakin life. Like on Trump Tower gold embossed letterhead. As I've said
before to you I could scrape off that logo and make fillings for everyone I know. I mean
that the logo is like a quarter of an inch off the page. Beautiful, telling me that he had no
money and sorry. And sorry, best of luck. I was working on something that P.S. is now in
120 cities around the world so like it would have been a safe bet to give me five hundred
bucks. Instead, I've got a story that I tell everywhere.

HOFFMAN:​ The story isn’t simply that you can’t take “no” for an answer. Anyone can do that.
And frankly, if you get too pushy, you’re more likely to get a restraining order than an investor.

The real story is about the power of persistence AND a good Plan B. Or rather, Plans B. Just
consider Nancy’s multi-channeled charm offensive. She deploys jokes, multiple boxes of Milk
Duds, letters, surprise visits, and a New York gossip columnist. This is what we call grit. And
GRIT is every entrepreneur’s trump card.

[​THEME MUSIC]

HOFFMAN:​ I’m Reid Hoffman, co-founder of LinkedIn, investor at Greylock and your host. I
believe successful entrepreneurs need ideas, money, good timing and a hefty dose of luck. But
none of those matter if you don’t have GRIT.

Some people mistake grit for sheer persistence. Charging up the same hill, again and again. But
that’s not quite what I mean by the word “grit.” The sort of grit you need to scale a business is
less reliant on brute force. It’s actually one part determination, one part ingenuity, and one part
laziness. Yes, laziness.

You want to conserve your energy. You want to minimize friction and find the most effective,
most efficient way forward. You might actually have more grit if you treat your energy as a
precious commodity. So forget the tired cliche of running a marathon. You want to be more like
Indiana Jones, somersaulting under blades, racing a few steps ahead of a rolling boulder and
swinging your whip until you reach your holy grail.

If you ask me, Nancy Lublin is the entrepreneurial equivalent of Indiana Jones. I wanted to talk
to her for this episode because she is a 10 out of 10 when it comes to grit. And she also does
her work in the not-for-profit sector, which has even more landmines than the commercial world.
Capital is harder to come by, talent is harder to recruit, and our overall society — at least here in
the U.S. — broadly rewards commercial people more than they reward non-profit people.

Before we get to our guests — the entrepreneurs who put the “grr” in the word grit — I’d like to
open, a bit uncharacteristically, with a quote from the Bible.

“The race is not to the swift, nor the battle to the strong, or bread to the wise, or riches to
the discerning, or favor to the skillful; but time and chance happen to them all.”

Time and chance happen to us all — except Nancy Lublin. Time and chance don’t happen to
Nancy. Grit happens. And once this quality kicks in, she’s unstoppable. Get her thinking about
some social problem, and she gets restless. She can’t tolerate it. Take, for instance, her
not-for-profit, Dress for Success. You’ll recall, she wanted to help women on welfare enter the
workforce in style. Entertainingly, Nancy never cared much for fashion. If anything, she finds it
ludicrous.

LUBLIN: ​My father growing up was a lawyer and he used to tell me that when he was
hiring secretaries he'd look out the window and watch them go from the car to the
building and then he'd know before they reached the building whether or not he'd hire
them. So I thought was the worst thing I had ever heard. I was like that's you just
described discrimination to me. That's horrible. And he said and it's the truth so go comb
your hair. And so I mean I just knew that the world works this way we discriminate based
on a first look on everybody. And so​ ​that's where Dress for Success came from.

HOFFMAN: ​So Nancy has just identified a huge problem. Employers judge job applicants—
especially women — based on their physical appearance. She might have valiantly struggled for
fairer hiring practices. But that’s a struggle for activists — the sort of people who can tolerate an
incremental battle with history and human nature.

But Nancy wants a solution now. She can’t change the way bosses think overnight. But she can
level the playing field by giving women access to professional clothing. She has an idea. She
has $5000 in seed money from her grandfather’s estate. And she’s about to get her first unlikely
collaborators.

LUBLIN: ​And so I was in law school I went to my law professor and said hey I have this
idea what do you think. And he sent me to Sister Mary Nurni in Spanish Harlem. And
then she brought in two others. When I went to meet them for the first time I fully
expected them to meet me in like in habit with locked arms singing like the Sound of
 Music...and instead they're really cool. They're like kind of like social workers. They’re
really cool women. The drawback was I took financial advice from them. They told me to
put the $5000 into a six month CD in the bank, which meant we start with no money. So
like don't take financial advice from people who take an oath of poverty is like the lesson
there.

Whenever I have done a startup, the first thing I actually do is call my family and friends.
Because you think “They love me, and I love them.” That doesn't mean they're going to
love your idea.

And the thing about the nuns is I really had no relation to them before. But they knew
fucktons about moving people from welfare to work. They knew exactly what was going
on in New York City and how to make this happen and how to get it started. They were
they were actually the exact right people to start this with.

HOFFMAN: ​So how did Nancy and three nuns manage to scale this idea worldwide? They
didn’t have much money. They didn’t have connections to wealthy philanthropists. And they
certainly didn’t have staff. Their only asset was their knowledge of the welfare system. That
system included a vast network of government and private agencies dedicated to helping
women. Nancy simply built an organization that could tap into this talent network for free.

LUBLIN: ​The challenge originally was we have these people who are moving from
welfare to work. How do you get them into the system without passing a judgment on
individuals. And then how do we solve our labor problem in the shop? So we combined
that. And what we did was we screened agencies. We would approve domestic violence
shelters. We would approve job training programs. We would approve homeless
shelters. And then they could send whoever they wanted to the shop. As a barter we
required them to send someone to staff the shop one day a month.

So we got free labor and high quality referrals and didn't ever have to pass any judgment
on the individual so everybody who came to us was worth dressing because one of our
employees essentially had referred them.... And by the way this model of staffing the
shop and referring stays today in over 100 locations around the world.

HOFFMAN: ​Notice what Nancy did not do — she did not try to build an entire system from
scratch by herself, which is a trap many entrepreneurs fall into. She looked around her for other
sources of energy. Like a tiny jiu jitsu artist, she redirects the energy of stronger, heavier
fighters. And this way, she channels the collective strength of the existing welfare system
toward realizing this idea with her.

You can think of this technique as a magnificent shortcut. And it’s the kind of shortcut Nancy
finds again and again. She darts ahead. She finds quick, systemic fixes to big gnarly problems.
It’s a pattern throughout her story of grit.
And the same quality that helped Nancy navigate the welfare system, worked just as well as she
worked her way through New York’s upper crust of donors.

LUBLIN:​ So in the early days of Dress for Success we would do these clothing drives.
So women would give us clothes so we would do a clothing drive at like Goldman Sachs
when they go corporate casual. And so we get beautiful beautiful suits and like the
largest suit would be a size 8 and the average size American is actually 14 and the
average size Dress for Success client was a 22. But we always did those suit drives
anyway because once you gave us your Armani suits you gave us money.

So we would take those suits and we might warehouse them for two years but we were
happy to get those suits from those women at Goldman because then they would write
us checks because they felt closeness to us because we had that suit that they like
interviewed somebody in or that they you know like went on CNBC the first time they
were wearing that Armani suit. Now we had it and so it was actually kind of a donor
mechanism. It was part of the whole cycle of Dress for Success, of kind of wealthy
business women connecting with women who are going to go out and land their first
jobs. That was the trick of the trade.

HOFFMAN: ​Notice how she keeps turning problems -- in this case, piles of useless clothing --
into solutions: a source of funding. It’s why I call the best entrepreneurs “infinite learners”. The
more thorny patches they hit, the more effective they become at hacking their way out. The only
problem is that some CEOs — like Nancy — get a bit addicted to problem-solving. If there’s no
problem to solve, well, they create some.

LUBLIN:​ I'm a wartime CEO. Once things get good and it's peacetime I get bored and I
either want to like do something else wild to it or I'll fuck it up because I'm like no but we
can do blah blah blah. And and so I get bored and I move on.

HOFFMAN: ​This is one of the byproducts of grit. It’s a sort of restless energy that eventually
compelled Nancy to leave Dress for Success, once it had scaled.

LUBLIN:​ Have we talked about Scooby-Doo syndrome? Have I talked about this with
you?

HOFFMAN: ​No.

LUBLIN:​ OK so you’ve seen Scooby-Doo?

HOFFMAN:​ Mm-hmm.

LUBLIN:​ Every Scooby Doo episode is the same. There is a church or a movie theater
 it's going to be torn down to become a strip mall OK. And there's like a zombie or a ghost
that’s haunting it. And so a mystery team gets called to find the zombie or ghost and
Shaggy and Scooby are somehow the ones that always find the zombie or go even
though Velma knew it the whole time which is totally weird but whatever.

And they unmask the zombie because it's not a zombie or ghost. It's like the
granddaughter of the founder of the movie theater or like the past the janitor of the
church. It's the fucking founder, the founder is the zombie or ghost haunting the building
it doesn't want to leave. I had no desire to be a Scooby Doo villain. Right. So I leave
things I build things and then I move on. I'm not particularly sentimental

HOFFMAN:​ And clearly you watch a lot of Scooby Doo.

LUBLIN:​ I mean come on I'm an 80s kid. We all watched a lot of that.

HOFFMAN: ​So Nancy found a new problem, a nearly bankrupt organization called Do
Something dot org. Do Something mobilizes young people to volunteer for worthy causes. Back
in 2003, it was nearly defunct.

HOFFMAN​: And so what was the state of Do Something when you arrived?

LUBLIN​: Bad. It was on fire. Andrew Shue started it when he was on Melrose Place but
then he went off air and had three kids in New Jersey, and Do Something fell on really
hard times. When I got there they had just laid off 21 out of 22 people. They had lost
their office space, and everything was in boxes in storage in Queens. They were $250K
in debt and had about $74000 in the bank it was totally totally fucked.

HOFFMAN: ​Nancy was smitten.

LUBLIN: ​I thought the name was great. Do Something was great. There was no
organization that was cool and fun for young people and it was there needed to be
something that made volunteerism and social change fun and energetic and so to me it
was like a ficus plant you know like the leaves fall off all the time. But like if the roots are
good you can probably bring them back. And I thought this is interesting. I've also just
turned 30 and I was getting headhunted for a number of very serious roles.

But what I realized was that the headhunter was only bringing in me to make the
headhunter look good, like here's one crazy outside the box candidate. Look we're
bringing you a 30 year old entrepreneur. No one was taking me seriously and I wanted
to take something that was totally screwed and prove that actually yeah I'm an
entrepreneur and I'm also really smart. I think sometimes entrepreneurs are written off
as wacky visionaries. You know we we can be more than that. We are systems thinkers.
HOFFMAN: ​Before long, Nancy got that ficus plant flourishing. The breakthrough moment?
When her team identified a crucial shift in technology that made all the difference in reaching
their adolescent audience. If you know a teenager, you probably already know: To get their
attention:? Text them.

LUBLIN: ​I think probably the biggest epiphany was the pivot to text. And the best thing
that I did was get out of the way. So I was on a conference call and I saw through the
glass door people in my office high-fiving each other. and I was like, “What is going on?
Why are you all so happy?” And it turns out that two like entry level employees had
polled 500 defunct users — like people we hadn't heard from in six months probably
email them 20 times and pulled their mobile numbers and text them about a campaign
we had done. And in nine minutes I saw a 20 percent response rate. Holy crap.

And I was I was smart enough to say “Let's do that.” And also I guess I was smart
enough to create an environment where entry-level employees felt comfortable
experimenting. And like that's what you've got to do as an entrepreneurial CEO is get out
of the way sometimes. And then when you see someone do something really smart:
Grab it and elevate it, and be like, “Let's do that.” And so we pivoted and we became a
membership organization and we did everything around text, and grew rapidly thanks to
that.

HOFFMAN: ​Nancy’s ability to tap EVERY resource around her — including her entry-level
employees — is one of her hidden strengths as a scale leader. Under Nancy’s guidance, Do
Something adds nearly 5 million teenagers as members. And then she does something truly
daring. She hatched an idea for a third not-for-profit called Crisis Text Line. And she goes ahead
and launches it, at the same time.

LUBLIN:​ I don't recommend having two full time jobs.

HOFFMAN: ​Notice how Nancy doesn’t relish holding down two impossibly demanding jobs at
once. But you have to understand her motivation. When she sees a problem, she wants to solve
it fast. The bigger the problem, the gnarlier the solution, the more she wants to solve it.

Her irrepressible urge to launch Crisis Text Line began with a single text from a single teenager.
You see, Do Something sent all its communications by text message. And their volunteers
would respond by text as well. Each campaign would unleash a wave of goodwill and cheer, for
the most part. But there were always a few teens who replied to these texts, asking for help.

LUBLIN: ​But there would be a couple of dozen messages out of flow saying things like
I'm being bullied. My best friends are addicted to crystal meth. And we would triage them

HOFFMAN:​ One day, Nancy read a text message that she couldn’t stop turning over in her
head. It was in response to a Do Something campaign.

LUBLIN: ​And then we got a message that put me on this other path, that literally said he
won't stop raping me. It's my dad. He told me not to tell anyone. And then the letters R U
there. Can you imagine? You're the CEO. Someone brings that and puts it on your desk
and says I don't know what to do with this. It's like being punched in the stomach. So
horrific. I couldn’t believe it was happening to a real human and then … How bad does it
have to be to share that, like to be so alone that you share that with an organization like
this, and you don't know where it's going. And so we built Crisis Text line really for her.

HOFFMAN: ​Here we come to the wellspring of grit. You have to have a mission — a calling
that’s so powerful, it makes you want to run through a minefield, on a foggy day, with your
shoelaces tied together.

Nancy envisioned Crisis Text Line as a hotline that would funnel text messages from distressed
teens to crisis centers around the country. It would open up a whole new line of communication
for teenagers who preferred the convenience and anonymity of writing from their phones. Nancy
figured she could earmark some portion of Do Something’s budget for the cause. They were
averaging $6 million a year in corporate sponsorships. There was just one problem. A service
for suicidal teens was not a natural fit for corporate sponsors.

LUBLIN: ​I went to the board and said I want to do this and you guys I think rightly said,
brand confusion with Do Something. Do Something is hope hopeful hopeful happy
volunteerism. Crisis Text Line is a different thing. Like we’ll give it our blessing. But
you’ve got to do it on the side. And so I did it at the same time for a long time. It was
harder than I thought it was going to be. And it was maybe harder than it should have
been. The truth is it took me two years to secure the funding to do it. I would dial for
dollars.

And I found one a friend that was like you'll come into my office every week for an hour
and go through my Rolodex, and on the third week I spoke to someone and in five
minutes I described it, and he said, “Stop, stop, stop. I'm going to give you $50,000
because someone needs to give you money to see if this will go anywhere. And I may
never see you again but it's worth putting this money down. And I want to be
anonymous.”

So I refer to him for a longtime as Mr. X. He's now fine being known. It's actually, it’s
Peter Blum, who is the board chair of Donors Choose, who has done this. He has made
bets on people like that, not expecting any return these early bets on social change
ideas. That's awesome. And with that money it became real. I had to really do it. I hired
our CTO and our Chief Data scientist, even though I only had $50K so that wasn’t going
to keep them very long. And so then it meant, shit I really had to find the rest of the
money and make this happen.
HOFFMAN: ​So Nancy, once again, was scaling on a shoestring budget. She figured Crisis Text
Line could piggyback on a patchwork of crisis hotlines across the country. She would supply the
text messages, the counsellors would supply 24-hour support. It was shaping up to be another
one of her clever jiu-jitsu moves, until Nancy found she was channeling their energy to the
wrong teens. Crisis counsellors tend to specialize in specific issues, like suicide or sexual abuse
or eating disorders. And this led some counsellors to write some rather awkward scripted
responses.

LUBLIN: ​We originally built this thinking we would just be the pipes we would be the
technology and we would farm this out to other crisis centers to do the counseling. And
we kept growing like fast fast fast and we went from 3 to 11 in like six months crisis
centers what we noticed was that they were incredibly diverse. Like one crisis center
would ask every single texter are you feeling suicidal today? No. I have a calculus final
this afternoon. Should I be feeling suicidal? Like the quality was all over the place wasn't
great.

So we culled best practices from the platform and said well what if we trained our own
people based on what we're seeing. And so we trained this magic 12 cohort and quickly
saw that they outperformed on every KPI and pivoted. So we dumped all of the crisis
centers who we were paying. So we saved that money. Moved instead to a volunteer
model and basically became a marketplace.

HOFFMAN: ​Nancy has made a hugely risky decision, here. She’s scrambling for funding. She’s
just jettisoned her partnerships with the experienced counsellors who were supposed to help
her scale. And if she has any chance of keeping her idea afloat, she has to now train an army of
novices in the art of texting with distressed teens.

Fortunately, Nancy has a gift for recruiting and celebrating volunteers. In fact, the greatest
shortcut Nancy has ever found — the one she turns to again and again — is the almost
bottomless well of human industriousness. What Nancy understands so well is that people love
to help. Sometimes all you need to do is ask them.

Nancy is so confident volunteers will answer her call, that she envisions a marketplace for crisis
hotline volunteers — much in the way Uber built a marketplace for drivers or Airbnb built a
marketplace for home rentals. But how on earth does she match supply and demand? She can’t
offer surge pricing to volunteers during a spike in teenage need. She can’t offer any pricing at
all. What she needs is a surge of good will.

It’s a bold vision. And there are a handful of other scale leaders who will tell you that this works.

GREG BALDWIN​: I think as a rule we tend to underestimate people's hunger and desire
to be helpful.
HOFFMAN: ​That’s Greg Baldwin, President of VolunteerMatch. Their website matches millions
of volunteers with more than 100,000 organizations that need their help. The most scalable
non-profits, he says, start with a plea for help that’s ambitious — verging on unreasonable.

BALDWIN​: When you know when Habitat for Humanity got started how unreasonable is
it to think that you can invite millions of people to help build homes for other people. It's a
crazy idea. When you think about it but it took somebody to ask to see how powerful that
ask is to bring people into doing something that they think is important.

Crisis Text Line is another amazing example of that. It's so unreasonable to think that
people would willingly take time out of their busy lives to be on their cell phone texting
with kids in crisis. It just it almost doesn't make sense why someone would do that. And
certainly you can imagine being reluctant to ask somebody to do that. But what we find
so often is it's in those big bold asks, those unreasonable asks, that some of the most
amazing things happen.

HOFFMAN: ​For this episode, we did a flash poll of the VolunteerMatch community — the
managers at non-profits who are on the front lines of these crazy requests. We wanted to know
just how hard they’ll push their volunteers. And how far was too far? So we asked, “Have you
ever heard a volunteer say, ‘You’re asking too much of me?’ More than 400 volunteer managers
responded. And statistically, speaking, it was a resounding “No.”

BALDWIN:​ Only 11 percent of Volunteer managers have ever heard that, which is
fascinating.

HOFFMAN:​ And then we asked whether they thought they could ask MORE of their volunteers.

BALDWIN​: And 70 percent of the users said yes. So the real question is: What's
keeping people from making these requests that are you know somewhat outside the
norm?

HOFFMAN:​ It’s a good question. And John Lilly, the former CEO of Mozilla, has a theory.
Mozilla is an open-source web browser powered almost entirely by volunteers. They do
everything from coding to marketing to translation — and John actually believes these
volunteers, working for free, can run circles around paid professionals. You just have to know
how to work on a sliding scale.

JOHN LILLY:​ So there are ways for people to contribute an hour a week, to 40 hours a
week, or 80 hours a week. And it kind of scales up and down, which most organizations
don't know how to do. They know how to have you be an employee or not, so sort of
binary. Open source, the successful ones, figure out a way to be on a spectrum.
Volunteers is not a homogenous category. It’s all sorts of different types.
 There's a guy I remember from Ulan Bator, who translated for Firefox into Mongolian.
And for him he did it because if he hadn't done that his parents wouldn't, who only spoke
Mongolian, wouldn't have been able to understand software to access the Internet. And
so for these people they do it as a labor of love. And you know you'll know this since you
learned Latin, but like the root of the word amateurs is omma which means I love. And I
think that amateurs and volunteers in many ways are more powerful than professionals
because they do it for non-monetary. They do it despite all the challenges and all the
hard parts.

HOFFMAN: ​And Nancy is an expert at whipping up that inner omma, that inner love. She starts
from the premise that she’s not unique in caring. Plenty of other people could care as much as
her. She just has to find them. And sell them on her cause.

And if you want to know what true grit sounds like, just listen to her multifaceted approach to
recruitment. She sounds a bit like a gold prospector who knows exactly where to pan along the
river.

LUBLIN:​ So recruitment sure. Zeroing in on like who are our best crisis counselors and
figuring that out was key and now finding more of them. Turns out that it shifts. LIke
post-election, sad liberals are great. We're loving sad liberals. People really want to feel
like they're they're having an impact on something and what's better than talking to
another stranger in the most dire moments of their life. It's a real impact. Moms of a
certain age, love them. Deaf and hard of hearing. Phenomenal. Most organizations don't
know what to do with them. Hard to volunteer if you're deaf and hard of hearing. We love
you. Veterans. I love veterans, especially when the heat is on and we're spiking. The
veterans are like “We got this. We can do it. Let's go.”

HOFFMAN: ​This swell of of volunteers allowed Crisis Text Line to scale quickly and meet the
growing — and spiking — demand.

LUBLIN: ​We've done zero marketing. We've done over 700,000 conversations since
launching. That works out to be close to 30 million messages exchanged.

HOFFMAN: ​But those 30 million messages didn’t arrive in a steady stream. They would spike
and dip, regardless of how many counsellors were available at the time. So she started triaging
the messages through a combination of grunt work and big data.

They had to identify the key words and phrases that teenagers use in times of distress, and then
rank those words on a scale from worrying to let’s call 911, immediately. They started with the
obviously distressing words​.

LUBLIN: ​So we originally put into the algorithm words like “die,” “suicide” or “overdose.”
 If you text in those words you're number one in the queue. And then we added a
machine learning layer and said well what really ends up in a high risk case. What are
the words people use? And it turns out that there are thousands of them that are more
high risk than than suicide. Apparently it's 16 times more powerful, not six times more
powerful, 16 times more likely to end up calling 911 than the word suicide which I know
I've already read this you know but whatever listeners can guess and it's it's actually it's
ibuprofen, aspirin, tylenol, advil it's the most common drug in your house.

So you not only have the idea and the plan but you've the means and the timing
because it's right in your medicine cabinet. So those words and the unhappy face crying
emoji is four times more powerful four times more likely for us to end up calling 911 than
the word suicide. The hashtag KMS. Any idea what that stands for? Neither did we. The
algorithms discovered that’s kill myself. This is a perfect example of science of data, of
technology making an organization faster and more accurate.

HOFFMAN: ​Before long her team was equipped to handle huge influxes of messages. Soon
she was detecting waves of anxiety rolling across middle schools nationwide. The data was
unprecedented in its scope and timeliness.

LUBLIN:​ Oh gosh. So the hard thing about marketplaces. So you don't control supply
and you don't control demand. Every once in awhile there’ll be an unpredictable event.
Now if I ran Lyft I can put surge pricing in place and so you can handle that. So
unpredictable events for Crisis Text Line are things like Zayn leaving One Direction. And
we had just tons of people texting in with serious anxiety.

HOFFMAN: ​For those listeners who haven’t heard of Zayn or One Direction, I’ll translate into old
fogie terms — Zayn would be Zayn Malik, a British singer for the boy band One Direction. And
when he left the band, it was a bit like Justin Timberlake leaving ‘NSync or John Lennon leaving
the Beatles. It may not sound like a big deal to people of a certain age. But to a lot of teenagers
at the time, the news was shattering. Nancy calls the surge of texts following his departure, “the
Zayn spike.”

LUBLIN:​ I mean the hashtag “cut for Zayn,” trended worldwide for almost three days
when Zayn left One Direction. These are girls cutting real skin hoping that he would see
this and rejoin One Direction. And that sent real traffic to us. That was rough. The
election night. At one point we saw eight times normal traffic mostly LGBTQ texters,
children of immigrants and immigrants themselves texting and asking if their family was
going to be deported and then sexual assault survivors, including survivors who had
been assaulted years ago but also had been assaulted in that 24 hour period saying
should I bother with my court case, should I bother going to police. Who's going to
believe me now. Feeling triggered by the election of Trump.

HOFFMAN:​ And how do you build the capacity for that?

 LUBLIN: ​Again as a marketplace.

HOFFMAN:​ And what's the size of the volunteer number?

LUBLIN:​ Yeah. That's over 3000. And and they take a lot of time and caring and love
and that's actually my primary focus. I mean they are who we are. And can you imagine,
they do it all for free like they're giving us time at two o'clock in the morning. They're
incredible, incredible people.

HOFFMAN: ​“They are who we are.” That one sentence sums up the approach to scale that
Nancy has taken throughout her career. She identifies the people and organizations who can
take her idea forward, and she makes them her own. There’s a lot to be said about sticking with
a vision, and adapting it through the years — weathering the rise and fall of luck.

But I don’t want to overstate the power of grit. Ultimately your plans are subject to luck. You may
be thinking, I thought grit was my superpower — my opportunity to overcome time and chance.
It’s a little more nuanced than that. I like the way Sam Altman, president of the Silicon Valley’s
most successful accelerator, Y Combinator, unpacks this problem.

SAM ALTMAN​: The way I have always tried to think about it for myself is that luck is a
big factor but I'm going to keep working and eventually you know because it's a random
variable it's going to swing my way. And I think that's roughly the right mindset to have. If
you don’t acknowledge the role of luck at all like I think you're Wrong in a dangerous way
where you sort of just are not a great human and you can't look at — I got really lucky at
some points — that's probably bad.

But if you're also like well it's all about luck and you know I have no chance. The world is
against me and I'm just going to sit here and complain that's not going to work either. So
I think the roughly correct mindset is luck is important. But I'm eventually going to get
lucky and I'm going to just work really hard until I do

HOFFMAN: ​That may be the one of the better definitions of optimism I think I've heard.

HOFFMAN: ​And to see how this interaction between grit and luck really works, I want to
introduce you to one last entrepreneur. Sara Blakely, the founder and CEO of Spanx, a $250
million a year undergarment industry heavyweight. On the one hand, she had the ultimate lucky
break. She sent a prototypical pair of Spanx to her television hero. She tells me she was hardly
prepared for what would happen next.

SARA BLAKELY​: So I invented this product and I sent a gift basket to Oprah of the
product with a note in it and found out Andre who dresses her put it in her wardrobe and
she put it on and loved it and basically has worn it everyday since.
 HOFFMAN: ​That's awesome. And then what did the show. How did the show impact
your business?

BLAKELLY​: Oh it was unbelievable. I mean I had no money to advertise I was running it

out of my apartment and Oprah held it up and said, “This is my favorite product.” So
everything started going berserk.

HOFFMAN: ​But this sensational appearance is actually just the tail end of her journey to Oprah.
Sara had been doing everything she could to appear on Oprah for the better part of a decade.
You probably haven’t heard about her failed attempts. Sara ticked off a few for me.

BLAKELY:​ Well when I was in my 20s in college, I had a visualization that I created for
myself that would mean that I had arrived. And my visualization was me sitting on the
Oprah Winfrey Show because in my mind, if I was sitting on her show it means I had
done something really right and done something amazing with my life. And I had no idea
how I was going to get there. But I was 100 percent sure I was there.

I mean I was so clear seeing myself on stage and then I called the next 10 years of my
life filling in the blanks I was always thinking is this what's going to get me on the Oprah
show. You know I take the LSAT and go to law school because I thought maybe I'd try a
famous case and that's how I end up on Oprah. But then I failed the LSAT twice and
couldn't get into law school. And then I did stand up comedy for a while and I thought
maybe that's maybe something here is how I end up on Oprah so I was consciously and
subconsciously pursuing things that I thought could ultimately get me to that that
snapshot that meant success for me.

HOFFMAN: ​Now before I leave you — Sara is offering you, the listener, a test of your own
mettle. You can speak to her, personally, about all of her plans B. She’ll call you, on one
condition.

BLAKELY​: And you know the scrappy side of me can't resist but I you know I told you I
just started Instagram and I would love for the people listening to follow me on Instagram
and I'm going to choose one of your listeners if they put #Masters of Scale in my latest
post that they see and I'm going to call them and do a private 20 minute call with them
where they can ask me anything.

HOFFMAN: ​Gritty listeners, the race to a master class with Sara begins now. And if you can’t
get Sara on the phone, don’t worry. You have countless plans B, so long as you have the grit to
see them through.

I’m Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Payal Kadakia

PAYAL KADAKIA: ​Every weekend I was, I felt like I was a like mini roadshow. Where
my parents would come with me and I'd have my costume and my cassette and I'd have
to walk in and make sure that the music played all right.

REID HOFFMAN: ​That’s Payal Kadakia. She’s been on stage since she was three years old.

KADAKIA: ​My earliest memories would be waking up on Saturday morning and going to
one of my friends' basements and we would dance together with a group of 10 girls and
learn Indian folk dances, which really connected me to my culture, it connected me to my
ancestors.

HOFFMAN: ​Her talent for what we’d now call “Bollywood-style” dance was a combination of
technical skills with empathy.

KADAKIA: ​Indian dance has a lot of obviously skills associated with it from just regular
technical skills but it also has this beautiful expression associated with it, too, which
taught me like, wow, you can actually help someone feel something when you express
yourself.

HOFFMAN: ​Dance gave Payal a form of expression. But what she cared about most had less to
do with what she expressed, and more to do with how the audience experienced it.

KADAKIA: ​I'm always performing for other people. I even think about rehearsals and
even when I think about music, I'm like, how is someone else going to feel when they
hear this and when they see this and when they see these costumes or they see us in
this formation?

HOFFMAN: ​Payal kept paying attention. She danced her way through her childhood. She
danced through college at MIT. She danced through her first job as a management consultant.
In 2008, she founded the Sa Dance Company to realize her own vision for Indian Classical
performance. And her eyes never left the audience.

KADAKIA​​: Whenever I am practicing or rehearsing, I'm always thinking about my

audience. It's very similar to always thinking about your customer.

HOFFMAN: ​Payal is constantly asking herself: How is my audience going to react to this move?
How is this beat going to make them feel? How are they going to be transported by these
costumes, or this music, or that twirl? When you’re in the spotlight, you ​have ​to ask those
questions.

And company founders are also in a kind of spotlight, with customers tracking their every move.
Payal knows this first-hand. Because when she’s not dancing, she’s also the founder and chair
of ClassPass, the fitness subscription service. Her years watching the audience would serve her
well, in this different kind of spotlight. Change the rhythm, and suddenly everyone’s murmuring
and fidgeting in their seats. One step in the wrong direction, and you can lose the whole crowd.
There was nothing quite like ClassPass when Payal launched it - there was no preset
choreography, no rhythm to riff on. And that meant she had to make up some of the moves as
she went — improvising in public on many of the things her customers cared about most.

For example and especially: pricing. How do you know what price to put on a first-of-its-kind
product? How do you gauge what’s low enough to entice crowds of new users, but high enough
to keep you in business? You probably won’t know — for a while. And in your company’s early
days, I’d argue it’s more important to get users in the door, even when you’re taking a very
steep loss.

But when you ultimately need to change the price? They’ll grumble for sure. A few might storm
out. But if you brought enough of them in — and if you’ve created something really compelling
— many of them will stick around.

That’s why I believe that the price that bleeds your business, may save your business.

[Theme Music]

I’m Reid Hoffman, co-founder of LinkedIn, partner at Greylock and your host, and I believe that
the price that bleeds your business may save your business.

Nearly all startup founders essentially start out deep in the red. It’s why I call startups the
walking dead. The cost of serving your first few customers is astronomical — and you’re in a
race to bring those costs down and revenue up as quickly as possible.

Depending on the price point you set, each new customer may dig you deeper into the grave —
or lift you out of it. That all depends on what we here in Silicon Valley call your “unit economics.”
How much do you spend on that customer? And how much do you make in return?

The MBAs will tell you to work out those numbers as soon as possible. In their view, the prudent
entrepreneur first proves that the unit economics are sustainable. Once you can say, “Yes,
here’s what customers will pay for my service. I’ll break a profit by X date,” then you’re free to
scale. And not a moment sooner.

But Silicon Valley, as regular listeners may have noticed, tends to operate by a different set of
rules. Frequently you have to scale first and figure out your unit economics later.

In fact, putting off this question is the prudent route for anyone playing in a winner-takes-all
market. Your competition won’t wait for you to figure out your unit economics. They’ll take all
your customers while you’re still in the middle of your MBA calculations. And then your unit
economics are really, irretrievably bad.
So you have to be prepared to lower prices to unsustainable levels — give your work away for
free, if you must. And even as you hemorrhage cash, keep telling yourself what many of Silicon
Valley’s iconic entrepreneurs have told themselves, “I’ll figure out a way to break a profit later.”

I want to give you a sense of how an entrepreneur starts flirting with fatal prices in the first
place. It has nothing to do with gutsiness or heedless risk-taking. In fact, the best entrepreneurs
I know are highly risk-intelligent — and they would absolutely love to figure out what their unit
economics are before they scale.

So why don’t they? Because the most scalable ideas require a leap into the unknown. They
don’t begin with a business plan. They begin with an observation of human nature driving a
crazy hypothesis — a nagging thought that might sound a little something like this...

KADAKIA: ​So, I’ve danced my entire life. It’s such a big core part of who I am. I danced
through MIT, I danced through Bain. It was something I just never let go of. And I wanted
people to have something like that that they could run to and go to and feel sort of
refreshed in their life.

HOFFMAN: ​Payal Kadakia has danced her entire life. It’s essential to who she is. And she
wanted other people to have something like that. That was the inspiration for ClassPass, her
fitness subscription service. For a flat monthly fee, users can sign up for a staggering variety of
fitness classes. They can dance if they want to – or do hot yoga or spin classes. The sheer
variety of classes is precisely what makes ClassPass such a hit. Since it launched in 2013,
ClassPass has scaled to more than 40 cities worldwide.

But the variety is also what makes ClassPass such a fiendishly difficult thing to price. How do
you set a fee for a grab bag of different classes that people use in different amounts? How do
you get the whole range of customers and fitness studios to all agree that the price is right?
Payal couldn’t answer any of these questions at the outset of her entrepreneurial journey. In
fact, she originally tried to sidestep those questions entirely.

Before ClassPass, she had a much less complicated business plan. In 2011, she founded a
startup called Classtivity.

The idea behind Classtivity was quite simple — she would create an online hub where users
could sign up for all types of classes — not just fitness, but painting classes, pottery classes.
Any activity you could hope to master, you could find on Classtivity. In short, it would be a
search engine for classes.

KADAKIA:​​ I was online, I was searching for a ballet class. I obviously had used things
like ZocDoc, OpenTable, SeamlessWeb, and it made sense. I was like, okay. Let’s build
an OpenTable model for classes.
HOFFMAN: ​OpenTable lets you search restaurants near you and find, well, an open table at the
right time. With Classtivity, Payal aspired to the same model — offer comprehensive listings and
a passthrough service for reservations.

KADAKIA:​​ It made sense to investors. I raised capital. I hired a team that bet on the
idea.

HOFFMAN: ​So how would Classtivity break even? Simple — like OpenTable or Seamless —
she would charge a small transaction fee.

And like that, she’d be in business. In fact, Payal was so convinced she’d be in business — big
business — that her team invested a year and a half in web development.

KADAKIA:​​ And we just wanted it to be perfect, ‘cause we just thought it would work.

HOFFMAN: ​It was gorgeously designed — a fully realized vision, ready for launch day.

Frequent listeners of this show may recall my theory that you never want to release a fully
realized vision in the software world — because it’s most likely flawed. In fact, if you’re not
embarrassed by your first release, you’ve released it too late.

Many successful entrepreneurs have discovered this counterintuitive theory the hard way. They
perfect their product, as Payal did, and then on launch day, well...I’ll let her tell the rest.

KADAKIA: ​And so, June of 2012, we launched Classtivity, finally open to the public. We
had thousands of classes listed, a beautiful design. And I would say we did about ten
reservations a month. It was terrible.

HOFFMAN: ​Yes, she said 10 reservations a month.

KADAKIA: ​I mean, our whole entire business was obviously based on the revenue
share we would get off of every transaction. And the business model was built on getting
millions of transactions through the platform, and we weren’t doing that.

HOFFMAN:​​ So, you launched with this notion of being the Yelp or the review site, and
the ability to choose good classes and be informative.

KADAKIA:​​ Right.

HOFFMAN:​​ And then what you found was people used you as a search engine, but
didn’t actually book.

KADAKIA:​​ Right.
HOFFMAN: ​I hear this story all the time — from entrepreneurs who failed and those who
succeeded. The difference? The successful ones keep trying. Not by digging in and assuming
they were right, but by asking themselves, over and over, “Where did we go wrong?”

Payal’s team started with the problems they could see on the website itself…which created
another problem.

KADAKIA:​​ So, in the middle of the summer, we started playing with buttons. I always
remember, I call it “the summer of buttons,” ‘cause we were contemplating—well, maybe
it’s cause the color’s wrong, or the shape is wrong. We were thinking it might be a UI
problem, and it wasn’t.

HOFFMAN: ​The “summer of buttons.” I know a lot of entrepreneurs who have lived through that
sorry season.

And I sympathize with Payal. When your service is under-performing, it’s incredibly tempting to
hyper-focus on the user interface — because that’s under your control. You can swap out colors
and move buttons around the page for months. Sometimes it creates a breakthrough. More
often, it’s a dead end. Interface changes are really useful for improving a user interaction that’s
fundamentally working. What design can’t do is solve a fundamental problem in your business
model.

All those other entrepreneurs who survived a “summer of buttons?” They all came to a similar
crucial insight, which Payal has carried with her throughout her career:

KADAKIA:​​ I think the other thing I realized over time is that technology actually wasn’t
going to solve everything for me. And I think of a lot of times, and you’re like, oh, I have
an engineer to build the site, and I don’t need to do anything, or I don’t need to get any
other information. And that was actually wrong. It was really, just see if I can actually get
someone to class in any mechanism possible, even if it was manually making
reservations, which we did a lot of once we figured it out. Because it wasn’t important yet
to get to a place where we were building scalable technology, because we didn’t actually
even have one customer.

HOFFMAN: ​But ultimately, if you’re a visionary like Payal, you’re not just trying to change the
way a user interacts with a button. You’re trying to change the way they interact with the real
world. And she was not about to change the world at a rate of 10 reservations a month.

I want to bring out something Payal didn’t do at this critical juncture in her career: She didn’t go
on autopilot. And believe me, after pouring a year-and-a-half of work into a website, you’d want
to go on autopilot. Instead, Payal had a moment of reckoning.

KADAKIA:​​ And I remember there was this clear day. It was about two months after we
had launched. And I think I just had to have that honest moment with myself. I was
 talking to an advisor. We had money in the bank, so I wasn’t actually worried. But the
worst thing you could do in that moment was actually just coast and let it fail.

HOFFMAN: ​You can’t rebuild from a bank balance of zero. You need money in the bank. And
the hard truth is that you can’t even begin to test your theories on pricing until your customers
reach some level of critical mass. You can either go the conventional route and get your “unit
economics” to work before you scale. Or you can do it the Silicon Valley way, by “bleeding your
business” with super-low prices that massively build your customer base.

But the hard truth is that you can’t do either of these with 10 reservations a month. Payal would
have to built a new runway after that failure to launch.

But this is one of my favorite things about entrepreneurship — you have to refine your theory of
human nature.

Every consumer Internet entrepreneur — and arguably every entrepreneur, period — needs to
have a theory of human nature. Your product should be based on your theory about how
humans behave, both as individuals and as groups. That theory should underlie your strategy,
your product design, your incentive program — every decision you make.

Many of the founders who have joined me on this show have shared these fundamental theories
— even if they didn’t announce them as such. Mark Zuckerberg has a theory underlying
Facebook, which he shared with us on the show:

MARK ZUCKERBERG:​​ People just have such a thirst for understanding what's going on
with the people around them in their community. Much more than you'd think.

HOFFMAN: ​Brian Chesky, CEO and co-founder of Airbnb, also has an underlying theory he
shared with us — about what travel means to people:

BRIAN CHESKY:​​ If you can belong out of your comfort zone and something new
happens to you, then there’s going to be a moment of transformation, where the person
you were, in a small way dies, and a new better version of yourself is reborn.

HOFFMAN: ​And Linda Rottenberg has a theory underlying Endeavor, which creates startup
ecosystems around the world:

LINDA ROTTENBERG:​​ The best ideas don't die in the marketplace or in the laboratory,
they die in the shower, because people don't even give themselves permission to walk
out of the shower and write it on a napkin and take it into the world because they're
afraid of what others are going to think about them. And they're afraid that people are
going to say well this is just a crazy idea.
HOFFMAN: ​For Payal, she kept returning to that founding theory that everyone should discover
a fitness routine that doesn’t feel like a chore, but rather a calling or an escape. You shouldn’t
force yourself to go to class. You should feel compelled by the class itself. It should be for them,
like dance was for her: A source of inspiration.

But there was a fundamental flaw in her theory — one that she wouldn’t discover — and never
could have known — until she started really asking her users, “What do I have to do to get you
off of your couch and into a class?”

KADAKIA:​​ To me, the hunt was to get someone to go to class. And I think all ideas were
on the table. But I just was like, let’s go build something new.

We were sitting behind the screen here, right? For a year-and-a-half, we were building
API integrations. We were building scrapers to get the schedule data. We weren’t talking
to our partners or our customers. And that was also something that we started doing.

HOFFMAN: ​Payal started interviewing fitness studio owners. She asked one after the next, how
do you get people to sign up for a class? And immediately she spotted a pattern of responses.

KADAKIA:​​ Many of them were offering a first class for free. Till this day, most studios do
that.

HOFFMAN: ​A free class — that might not sound innovative — but “free” is actually the force
multiplier that countless Silicon Valley companies have used to achieve scale. It’s like the
dynamite that they use to blast through mountains of indifference. And like dynamite, freebies
are also pretty dangerous. You better know what you’re doing and set off a controlled
detonation.

Freebies are an extreme example of the “fatal pricing” that will bleed your business. There’s no
faster way to get a lot of people in the door than with a give-away. But if those freebie-seekers
don’t convert to paying customers, then you’re just left with hemorrhaging. For the price that
bleeds your business to save your business, you need a conversion path.

Payal devised the perfect experiment. She had already partnered with studio owners across the
city. She had a central view of all their freebies. And it occurred to her that she could bundle all
of those free classes together into one package deal. A user could then hop from class to class
— and perhaps discover their true fitness calling. And Passport would benefit by bringing them
in the door of all these varied studios.

KADAKIA: ​We had this idea of packaging it together into one product called a passport.
I said, what if we could offer a 30-day period where people could go and try ten classes,
and on the other side of it, we would do retargeting and remarketing to get you to go
back to these studios. This was a new idea. It was great that we had built a lot of, like,
 the scheduling software. And what was nice is people did like this idea, so we started
finally seeing reservations. We had people buying this product.

HOFFMAN: ​The Passport was an immediate success. User enthusiasm ran so high, that when
their 30-day grand tour expired, some users tried to cheat the system. They signed up for a new
passport, under a new email address. Basically, they started forging passports. Payal was
delighted.

KADAKIA​​: So, we started thinking about this, and I was like, okay, everything is really
actually pointing towards a subscription, because people were signing up with multiple
email addresses.

So, we did a survey, and 95 percent of our users said they would buy the product again
if they could go back to their favorite studios.

HOFFMAN: ​Through the power of free — Payal had discovered a whole new market. You might
call it the market for fitness dabblers. To Payal’s surprise, they never discovered their fitness
calling through one class alone. They found their fitness calling through a variety of classes. Her
vision had come into focus, and it revealed a picture that she could have never foreseen.

KADAKIA:​​ They wanted to do a spin class on Monday, a dance class on Thursday, a

yoga class on Saturday. And I think the other really beautiful thing here was that people
realized their potential. And I think for me, as a founder with the vision we always had, I
wanted people to find what I had had in dance.

In a strange way, this passport product, that was the magic to it. And that was, still is, the
core of what made ClassPass everything it is. People loved variety. And no one realized
that. There was this market out there for dabblers, when everything was trying to push
everyone to be like complete loyalists. And there are definitely both sides, and I think
people go in and out of those cycles in their life. But there was only sort of the gym for
the dabbler.

HOFFMAN: ​She could see it, a confederation of gyms for the fitness dabbler. One class pass to
rule them all. And 95 percent of her users wanted it. Now she’s onto a truly scalable idea. And
she’s about to take an extraordinary leap into her theory of human nature.

Scale entrepreneurs don’t just posit a theory. They go one step further, and ask, “So how can I
use this theory to change human behavior?” In Payal’s case, she was asking, “If my mission is
to get everybody to lead a more fit lifestyle — how do I facilitate that?”

Now most entrepreneurs take the easier path to scale. They play to our vices, because vices
are actually much stronger than the virtues. So, for example, convincing someone to floss or
convincing somebody to go exercise is actually much, much harder than to convince them to
watch something scandalous — you know, the equivalent of the people who slow down to look
at the burning car at the side of the road.

One thing I’ve been saying for the past 13 years is that I tend to invest in companies that play
into one or more of the seven deadly sins. Facebook plays into our vanity. LinkedIn? Greed,
naturally.

I could go on, but the point is, you don’t just want a trigger for user behavior — you want a
hair-trigger. Now Payal might not be able to tap that hair-trigger response to exercise
— because that’s just human nature. She’s trying to rev up virtuous behavior, which is much
harder to get started.

But the hardest ideas are often the most scalable, and it’s one reason I admire Payal’s
relentless pursuit of this business model. She’ll have to fight to get users into the habit of
exercise. And their habits will shift unpredictably — which means her prices will be highly
unstable as well.

And even if she compels users to try out a few classes — that will only solve half her problem.

KADAKIA:​​ There was another problem, which was that people weren’t going back to
these studios.

HOFFMAN: ​That’s right, the other half of her user base, the studio owners, were essentially
asking, “What’s in it for us? Would any of those users taking advantage of our first free class
ever return as paying customers?”

KADAKIA:​​ And that was ultimately the promise we had made. And these studio owners
were giving us these classes for free. So, long-term, it wasn’t great for our partnership
with them. But the good side of this product was we realized people loved variety.

HOFFMAN: ​So Payal had to make a decision — would she continue selling a 30-day passport?
Or would she remove that expiration date, and enable users to take a variety of classes,
indefinitely? In essence, should she rebuild her business model?

This wasn’t an easy decision — because Classtivity was finally generating real revenue. They
were making money. It was a simple business model based on a small transaction fee for each
booking.

KADAKIA: ​We actually were 100 percent profitable ‘cause we weren’t paying the
studios. But at the end of the day, I was fast-forwarding in my head, and I’m like, this just
feels like a bad deal site and a bad program.
 And I didn’t want to change people’s lives for a month. I wanted to change people’s lives
constantly, and the only way to really do that was through a product that was gonna
have more retention. And so, we decided to move into the subscription.

And I think my team was like. I think they were tired. I think people—you have to
remember, this was three years in. And I mean, at this time, we were also making every
reservation manually. We all stayed up till 2, 3 in the morning every night. A reservation
would come in. We didn’t build the technology early on. It would literally send one of us
an email. We would go onto the site, make the reservation, and send a confirmation
back to the customer. And so, all of us were doing that. We were all doing customer
service. So, there was a little bit of that, of people just being like, well, we finally are
there. Like, why do we need to change? And what we ended up agreeing on, which was
fine, ‘cause I didn’t know, is we actually didn’t know if the passport would become lead
gen for the subscription.

So, we decided to not completely let go of the passport at the time. And then when we
launched ClassPass, we realized it was just tweaks to it, right? So, from an engineering
perspective, it was the passport, it was just with—you could go back to a studio. Okay,
great, and it was a monthly subscription.

HOFFMAN: ​And so, in 2013, one year after the launch of Classtivity, Payal launched a service
that would become her second startup. She called it “ClassPass.” For a $99 monthly
membership fee, users could sign up for 10 classes a month — They could dabble away,
indefinitely.

If that doesn’t sound like a radical departure from the Passport, then consider the user
response.

KADAKIA:​​ Three months into the subscription, the revenues of ClassPass overtook the
revenue from the passport. And I think the other part was I started getting these letters
from our members that were just about their lives changing, and that they never enjoyed
working out, and they look forward to working out, and they felt more confident, they got
a promotion, they found love. Like, it was this interesting thing where I realized I had
changed people with the product, and that was really what I had set out to do.

HOFFMAN: ​It was as if her users had said, “Forget Classtivity, forget the Passport — forget all
of the work you’ve done over the past year. We now dub you: ClassPass.”

When your users send a clear signal to scale a product, you have to jettison any other products
that might steal your team’s attention. We talked about this in detail on the episode called “The
Big Pivot” with Stewart Butterfield from Slack. Because shuttering a legacy product is never
easy. But it’s easier when it’s failing. It’s much harder when you’ve seen modest success, like
Payal did with Passport. That’s when you’ll really struggle to throw away your hard work and
that modest stream of revenue. Sometimes, a blunt talking mentor can help you rip off the band
aid.

KADAKIA:​​ I remember talking to another advisor, and he told me to get rid of the
Passport. He was like, “It’s crack to you guys.” I mean, it was kind of funding our
business in a way, right? I mean, because we were making cash from it. It took me about
probably three months to kind of come to terms with that. I felt like I had given them what
I wanted, right? Like, that mission inside, it was like it literally was realized in the
subscription product.

And so, decided to shut down the passport and Classtivity. And I remember him saying
to me, “The passport will be a chapter in your book.” And in the halls of ClassPass today,
I mean, the passport is like a data field, right? My engineers are like, “What was that?”
And I’m like, right. He was totally, absolutely right.

HOFFMAN: ​So with Classtivity vanishing down the memory hole, Payal could give her
undivided attention to her newest venture, ClassPass. She had hopeful investors. She had
wildly enthusiastic users — and the thank you letters to prove it. She was poised for a rapid
expansion into new cities. She would get to test her theory of human nature on a global scale.

Only one piece of the puzzle remained: The price. At what price could she enroll enough
subscribers to this new model of fitness. She had an inkling of what users might pay.

KADAKIA:​​ So, we have this product out on the market, $99 for ten.

HOFFMAN: ​So for $99, her users could take up to 10 classes each month. Why 10? It seemed
generous enough. The average user took five classes. So the average user probably wouldn’t
even notice the cap. Or so she thought...

KADAKIA: ​And one of the things that was interesting is, ten classes is actually—to
some people, was impossible. And to some people, it wasn’t enough. And we also
started getting people who were sometimes churning, saying, “Oh, I only went to eight.”
And I’m like, this is so interesting that people were like tying themselves to this number.

HOFFMAN: ​Notice how she didn’t expect users to “tie themselves to this number.” In fact, they
tend to tie themselves up in knots when you try to change that number. This is the gordian knot
of user expectations…and there’s no easy way to untangle their demands.

Almost any move you make after you’ve slapped an initial price on your product comes with the
risk of sending your customers scattering.

When users sign up for that price - the one you probably used in marketing, the one that your
earliest fans decided was worth it - you’ve sort of made a promise. At the very least, you’ve
solidified a key part of your company’s brand. Think about Subway Sandwich shop and their
inescapable earworm. “Seven-dollar footlong” just doesn’t have the same ring to it.

So when you hike your prices, even by a negligible amount, some of your users will feel like you
broken your promise. At that point, it’s personal. And it can drive even your most passionate
fans to come at you with pitchforks.

So why risk it at all? One word: competition. Payal noticed them closing in. It started with the
successful experiment that ClassPass ran, to test their users’ appetite for classes.

KADAKIA: ​We kind of wanted to once again experiment with this idea of what if we
didn’t put a number on it, to see what would actually happen. And so, we launched this
summer promotion called Unlimited Summer, where people could go to as many classes
as they wanted to.

And we saw people love it.

HOFFMAN: ​This flat monthly fee offering unlimited access is another classic pricing model to
bring customers in the door. There’s no faster way to get them to commit than to create a
subscription, especially one that auto-renews. In some cases, monthly fees create a cash cow:
They ​feel​ like a bargain to customers, while actually creating profits. In other cases, monthly
fees with “unlimited” access bleed your business in the short-term, but save it in the long-term
— after a crucial price hike.

Payal doesn’t know yet what her unlimited pricing will do for her bottom line. But she knows it
will give her the critical insight she needs into customer behavior. And from that, she can make
sure her price was right.

For now, though, it was working. Demand had surged. Customers loved the offering. It seemed
like the right time to start a round of funding.

KADAKIA: ​And then we announced our series A, our $12 million dollar round, and it was
a great moment. And always in hindsight, I’m like, I don’t know if I would have done that.
Because what it did is it spurred competition in every market.

HOFFMAN: ​Payal’s Series A financing round brought in real money - but it also brought in the
wolves. ClassPass competitors started popping up all across the U.S., and they each had the
benefit not only of Payal’s idea, but also of a fresh start. They weren’t beholden to those
promises - of pricing, of number of classes - that ClassPass had made.

KADAKIA: ​Everyone was copying the unlimited model, right? And so, it became a little
bit hard to go back on that.
HOFFMAN:​​ Imitation is the sincerest form of flattery, right? If you pilot an idea and everyone
copies it, it’s a good indication that you’re onto something. But it also means two things: one, if
you don’t lean all the way into that idea, your users might drop you for the five, ten, twenty
similar products that have popped up. And two: You better start sprinting.

With all those competitors fielding the unlimited model, Payal found herself locked into it. Not
only that - she had to both perfect that model and get it up and running before any of her
competitors did.

KADAKIA:​​ So, we went to the ground, and we had to fight our own battle, too.

HOFFMAN: ​Said, let’s hit the pedal to the metal. Let’s go as fast as possible.

KADAKIA:​​ We completely did. Yup, absolutely.

HOFFMAN: ​For ClassPass, that meant staking flags in the national fitness landscape. City by
city, they decided: Which could they not afford to lose.

KADAKIA: ​Me and my cofounder sat down, and we were like, let’s just go. And we
decided it was called Operation 2015. It was 20 cities by January 1 of 2015. So, in
two-and-a-half months, we decided to launch 12 additional cities on top of what we were
going to.

HOFFMAN: ​They were definitely going to need a bigger team.

KADAKIA: ​I remember that whole weekend, we just spent interviewing sales folks. We
sent them out into the markets, and we did it. And so, by January 1, we were in 20
markets.

HOFFMAN: ​Twenty new cities. Twelve of them in two and a half months. Make no mistake:
Payal and her team sprinted.

KADAKIA: ​We needed to make sure the studios we were getting on board were right, so
we had someone go and try them.

HOFFMAN: ​Payal basically air-dropped employees into new cities like soldiers.

KADAKIA: ​We’d always just send people in.

HOFFMAN: ​Soldiers who could reach her personal line around the clock​.

KADAKIA:​​ You have a problem? Like, you know, call my cell phone.
HOFFMAN: ​Everyone at ClassPass sprinted for those grueling two-and-a-half months. And
when they looked up - they’d done it. They were in twenty cities, and their competitors? Mostly
left behind.

But the problem with being that far ahead in uncharted territory? There aren’t any footpaths you
can follow, or markers you can orient yourself with. Payal had latched onto the unlimited model,
but she hadn’t yet figured out the unit cost of each bundle of fitness classes. She’d made a big
promise to her users, but they hadn’t made any promises in return.

Some took the “unlimited” offer seriously, attending so many classes that they did more than
“bleed” Payal’s business, they caused a hemorrhage. For them, ClassPass was a bargain!
Others barely took a class. For them, it was absurdly expensive.

And this split in behavior is one that many businesses grapple with. How do you set a single
price when usage patterns vary so wildly? How do you know who your loyal users are? How do
you know just much they’ll pay? What are their breaking points? You cannot answer these
questions by running limited-time-only experiments with your pricing — you have to go all in to
really understand how users will respond.

And Payal had just grabbed this bull by the horns. ClassPass was a rollicking success. Now she
had to figure out how to sustain that subscription model, indefinitely. The price that bled their
business could save their business — if she gets the numbers right.

KADAKIA: ​So, this is when we went through a series of price changes. And we spent,
you know, the next year-and-a-half doing it. And look, there’s no blueprint. But I also
didn’t want to be a gym membership in the sense of like making someone sign a
year-long contract to really be able to benefit from people not going, right? That was
something that was like—it was a little bit hard, because we were kind of flirting with two
different models and trying to change people’s behavior.

HOFFMAN: ​Payal was torn: Smaller bundles of classes for lower fees, or unlimited classes for a
higher one. They just didn’t have enough data to decide what was going to be the most
sustainable. ClassPass tried to run both models simultaneously.

KADAKIA: ​So, we ended up launching a five-pack and a ten-pack. But what that meant,
because we knew the lower usage users would go on the five and the ten, the unlimited
plan had to up even higher.

HOFFMAN: ​And this process of fine-tuning prices rarely goes off perfectly the first time.

KADAKIA: ​It was hard. We couldn’t predict where usage would fall. We did a small price
increase, and it wasn’t enough, which is really hard to do, right? When you know you put
it out there, it’s a hard moment, and then it didn’t work, because we were churning out a
 lot of the users who weren’t going to enough classes because the price was higher. And
we were trying to find this price point where maybe it was low enough where the lower
usage users would stick with us. It just—it wasn’t happening. So, after the first price
increase, I think I started realizing, I’m like, this is gonna—we’re just gonna keep having
to increase price.

HOFFMAN: ​So the way Payal sees it, the price changes were a difficult, but necessary part of
keeping ClassPass available to more users - keeping it running, for that matter. Her customers
felt differently.

After the unlimited subscription price went up for the second time — one user tweeted “Raise
your hand if you’ve been personally victimized by ClassPass.” “No no. Cancelling my
membership NOW,” tweeted another.

To be clear: ClassPass was not the first company to experience that particular kind of customer
riot. And they definitely won’t be the last. When Netflix raised its subscription prices, customers
were outraged - not necessarily about the new price tag, but about how it made them ​feel.​ “I can
definitely afford it,” one angry ex-customer said, “but I dropped them on principle.”

When LastPass, the popular password-storing app, raised its premium prices by just one dollar
a month, a customer tweeted that it was like a “slap in the face.”

Some amount of backlash is inevitable. It’s just human nature. No one ever wishes they could
pay ​more f​ or a service, no matter how much they love it. And what happens frequently in growth
cases like ClassPass is that you start with a business model that’s unsustainable. It’s the only
way to hook that vital set of early users. But if you stay with that business model, you die.

This was also true of PayPal. Our burn rate was tens of millions of dollars each month. That was
considered crazy at the time. Now, it’s a bit more common. For example, Uber’s burn rate is
considerably higher. Eventually they’ll have to change their pricing, either how they pay drivers
or charge customers some years down the road. It’s hard to predict, and I bet Uber’s executive
team couldn’t tell you right now either. It’s the nature of working in fields where the rules are still
being written.

At PayPal, one of our early promises was simple: Add a friend to the platform, and you’ll each
get ten dollars. It was an easy, effective way to build out our early user base. But eventually, it
got so expensive that PayPal’s co-founder, Peter Thiel, wanted to scrap the entire idea - and
break that early promise in order to keep costs down.

But from my point of view, there was a way to keep that sparkly, eye-catching promise intact.
We just had to dim the sparkles a bit. We still gave users and their friends that gift of 10 dollars
each, but to get it — you had to give us a little more: You would have to enter your credit card,
validate your bank account, and load fifty bucks into your new PayPal account. We kept that
promise of 10 dollars. You just had to work a little harder for it.

And this brings me to my next point: When you’re making the critical transition from bleeding
your business to saving your business, you have to be hyper-aware of avoiding a mob reaction.
And mobs rally behind very simple statements.

They’re going to get fired up if they read “PayPal stops giving new users the money that they
promised them!” But they’re probably not going to linger for too long on “PayPal asks for slightly
more information from new users but continues to give them the money they promised them.”

You have to know what it is about your service that your customers find invaluable. Protect that
- that’s the only promise that really matters. Pricing riots die down, and if you have a service that
customers ​really ​love, they are eventually going to let you out of the doghouse.

Take it from Payal. Yes, the uproar about ClassPass pricing got very loud, and pretty mean. But
at the end of the day...

KADAKIA: ​We lost very little of our members. Some of them, I think, supplemented their
ClassPass membership. So, they stayed on the ten-pack and they ended up getting a
gym membership.

HOFFMAN: ​So Payal inadvertently catalyzed a reaction that was ultimately at the heart of her
company’s mission: Get people exercising, exactly as often as they wanted. Some of her users
were sticking with ten classes a month - maybe so they could try out taekwondo, or spin, or
dance every once in a while - but taking the money they might have spent on an unlimited pass
and spending it at their local gym, instead.

And the entire process - the price-tweaking, the different models, the customer reactions -
taught Payal a lot about the alignment of mission and money.

KADAKIA:​​ I think I’ve learned this lesson—whatever your vision is and your business
model need to align. When you’re realizing that the business is hurting at the expense of
your mission actually working, that’s not a great setup.

HOFFMAN: ​And chances are, if your vision and your business model are truly aligned, you’ve
created something you love. Meaning there’s a good probability that other people out there are
going to love it too. And if they really do love it, and you’ve built something both innovative and
invaluable - like a Netflix, or a LastPass, or a ClassPass - your users will put down their
pitchforks. And they’ll plan their next workout — while binge-watching an entire TV season.
Because for Payal, it’s something about the ​feeling t​ hat ClassPass offers that’s important. It’s a
feeling she’s ready to chase alongside her users.
 KADAKIA: ​It’s a feeling of being limitless, right? It’s a feeling of, I can work out and I can
go to class. It’s not just about the prices, and if the product is unlimited. And we’re still on
that journey of making sure that the product feels that way. And I think that’s on us to
figure out, because that is what our core mission is.

HOFFMAN: ​I’m Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Peter Thiel

DARYL WOODSON​: Speed is not manufactured by how fast the feet move, but how
much force per step.

REID HOFFMAN​: That’s Darryl Woodson, a personal coach to some of the fastest runners in
the world. He trains Olympic athletes who have broken one world record, three national records
and claimed 10 national titles. Darryl doesn’t have a single training regimen for these Olympic
medalists; each runner has unique strengths. Some runners, for example, seem to explode off
the blocks. When Darryl sees that explosive quality, he lights a match under them.

WOODSON​: It starts in your head. The brain controls 100% of your muscle capacity.
Sometimes a runner’s brain functions a lot quicker than other people. It’s more natural
for them to just be explosive.

HOFFMAN​: Now if any runner embodies this explosive quality, it’s Natasha Hastings. She’s a
two-time Olympic gold medalist. They call her the “400-meter diva.” And when it comes to
starting off the blocks, she’s a powder keg.

NATASHA HASTINGS​: My start is pretty explosive. I’ve even been asked, “Well, why do
you start so fast?”

HOFFMAN​: Natasha and Darryl spend a lot of time thinking about that first stride.

WOODSON​: The most important aspect of acceleration are the first two steps. That’s
what’s going to manufacture the greatest power output.

HASTINGS​: One of the things that I always think about is those first few seconds,
there’s an energy system that you’re never going to get back. So why waste it?

HOFFMAN​: Now that’s the plan that gets Natasha ahead of the competition. It takes natural
talent, and training—yes. But also a very specific mindset. And I would argue a similar plan
applies to Silicon Valley’s fast-growing companies. They’re built for explosive starts.

Peter Thiel—the founding CEO of PayPal and one of the Valley’s sharpest investors—won’t
back a company if they don’t have this kind of potential. He has to believe they can not only get
ahead​ of the competition, but ​break free​ of it entirely.

PETER THIEL​: I do think that for a really valuable business, you have to at some point
try to achieve escape from the competition. And so if you could scale incredibly fast, on
the one hand, you have to race really hard to scale fast—but the benefit is that you're
achieving escape velocity from the black hole that is hyper-competition.
HOFFMAN​: I rarely agree with Peter. But in startups, we find common ground. I believe that if
you want your company to scale, it’s not enough to ​beat​ the competition. You have to break free
of the competition altogether.

[Theme Music]

This is Masters of Scale. I’m Reid Hoffman, co-founder of LinkedIn, investing partner at
Greylock, and your host. I believe if you want your company to scale, your goal is not to ​beat​ the
competition. Your goal is to break free of the competition entirely.

In an ideal world, you do this by going where the competition ​isn’t​. You invent your own game
and master it. But to be clear, this is more of an aspiration than a feasible goal. At best, you’ll
get a grace period—a fleeting moment when no one believes in your idea. And as soon as your
idea takes off, watch your back. Before long, you’ll find yourself where most businesses start:
facing competition. Your goal? To break free.

That’s what happened to PayPal—and I want to share that story with you, because it’s easy to
say, “I’ll break free of the competition.” It’s quite another thing to be in the heat of the race,
unaware of where your competition stands, or whether you’re truly breaking ahead.

I wanted to talk to Peter Thiel about this, not only because he guided PayPal through those
precarious early days, and went on to invest in company after company that embodied this idea.
But also because he has some of the strongest opinions on competition—and, well, on almost
anything—of anyone I know.

I first met Peter at Stanford, and right from the start, we clashed on a lot of issues.

THIEL​: It’s always the joke we have Reid. Where you’re the socialist and I’m the
capitalist.

HOFFMAN​: We were fierce young men back then. I’m pretty sure he saw me as a bleeding
heart pinko commie. And I’m absolutely certain I saw him as a libertarian wacko who seemed to
have sprung out of Ayn Rand’s book, ​The Fountainhead,​ fully formed.

Our first dorm room debate pretty much consisted of us saying to each other, “You can’t
possibly believe that.” And that feisty exchange continued throughout college through the
founding of PayPal—and yes, as some of you might know, through the 2016 presidential
campaign.

I’ve known Peter for three decades, and I ​still​ can’t predict where he’ll land on many issues.
Who would’ve imagined that my former PayPal colleague would back Donald Trump? Not me.
And yet there he was, at the Republican National Convention. Go figure.
I met Peter in August, and we sidestepped our political differences. If you really want to hear us
duke it out, tweet us at Masters of Scale. We just might be able to arrange a follow-up interview.
Peter, consider yourself on notice.

On today’s show, we’re going to shelve our political disagreements and consider one rare point
of consensus—that the whole point of scaling fast is to ​escape​ your competition.

But Peter didn’t always try to avoid competition. For most of his life, he ​thrived​ on
competition—as he himself will tell you.

THIEL​: I was incredibly competitive in elementary school, junior high school. I remember
in eighth grade, one of my friends wrote in my eighth grade yearbook, “I know you're
going to get into Stanford four years from now. Four years later, I went to Stanford, and
then I got into Stanford Law School, and I ended up at a top law firm in Manhattan. And
it was sort of winning one competition after another.

HOFFMAN​: So Peter has always had this competitive streak. But another thing you should
know about Peter is he also has a ​very​ serious contrarian streak—and those two qualities don’t
sit comfortably together. On the one hand, he wants to race against his peers. On the other
hand, he wants to stand apart from them entirely. For most of his childhood, he let his
competitive nature get the best of him.

He was a champion chess player. He trounced his peers in class rankings and LSAT scores. At
last, he had reached his competitive nirvana: law school. And then?

THIEL​: Maybe I was attracted to law school because it was very precisely rank-ordered.
It was a thing you could go to next after undergraduate. And the paradoxical thing that,
when you compete very intensely, you do get to be very good at the thing you're
competing on. But then, you often don't ask enough critical questions about whether the
thing you are competing on is really worth doing.

HOFFMAN​: Good question. Peter didn’t have an answer, so he just kept competing. He clawed
his way to the top of the class. Then he landed a job at a prestigious law firm.

All the while, that question—”Is this worth it?”—still gnawed at him. And as his career reached
new heights, he had a sinking feeling: he wasn’t winning. In fact, he felt trapped.

THIEL​: It was this very strange place, the law firms. From the outside it was a place
where everybody wanted to get in, on the inside it was a place where everybody wanted
to get out. When I left after seven months and three days, one of the people down the
hall from me said that he had no idea anyone could leave this quickly, and that it was
possible to escape from Alcatraz.
HOFFMAN​: All that work—all that ​winning​—had landed Peter in a prison of his own making.
And like any inmate, he began to question his life choices. Then it dawned on him, the root of
his problem was an obsession with winning. Who cares how anyone measures up to their
peers? Competition, he decided, is for ​losers.​

I’m not overstating his argument. He really says that.

Google the phrase “competition is for losers,” and the top results all point back to Peter Thiel.
There’s his Wall Street Journal op-ed, headlined: “Competition is for losers.” He said it to me
too.

THIEL​: By the time I was at Sullivan and Cromwell, five years before we started PayPal,
I came to question conventional competition. I thought that a lot of the conventional ways
people competed resulted in too many people doing conventional things, and then you
end up in very competitive dynamics—and then even when you win, it's not quite worth
it. So you might get a slightly better-paying job than you otherwise would, but you sort of
have to sell your soul. And so that doesn't seem like a very good economic or moral
tradeoff—and the kinds of things like that, that happen with conventional competition.

By the time we started PayPal, I was focused on, “How do we compete very
intensely—maybe to avoid competition altogether?”

HOFFMAN​: I often disagree with Peter, but I have to say, on this point, he’s spot on.
Competition will make you, at best, a winner in a losing game. If you really want to scale a
business, ​escape​ the competition. Change the playing field. Hang up your jersey. This applies
to businesses as well as individuals. Don’t try to beat the competitors at their own game. You
have to invent a new game—and master it.

And that’s precisely what drew Peter to the idea of online payments. It was 1998. Everyone
wanted to sell stuff online, but no one had an easy way to pay for that stuff. Peter saw an
opportunity to essentially ​invent​ the Internet’s cash registers.

THIEL​: By the time we started PayPal when I was 31, I was focused on doing something
entrepreneurial, doing something that strictly speaking, other people were not doing.
There's this question about financial cryptography. Could you start a new currency?
Could you start some new secure financial product? And so that was sort of the
intellectual set of ideas that we were very interested in exploring. And then we were also
very focused on getting to scale as quickly as possible. How do you get it to grow by
word of mouth? Reid, you and I had many late-night conversations about virality and
exponential marketing.
HOFFMAN​: After talking with Peter, I realized that his ​memory​ of PayPal’s early, experimental
days was of a solitary, heroic struggle to make online payments a reality. But the fact is, we
weren’t alone for long.

EBay had emerged as the leading online marketplace for selling, well, everything. Their power
sellers flocked to PayPal; they caught us by surprise. Who were these users? Not at all the ones
we imagined.

THIEL​: The way I remember it was the initial reaction was quite negative. It’s like, “Wow,
this is the junkiest stuff being sold on the Internet, and it’s so bad for our brand to be
affiliated with all of this.”

HOFFMAN​: Entrepreneurs, take note! Your first users are often not at ​all​ what you imagined.
They’re often less glamorous, and fewer in number. Don’t be too quick to judge them. They may
prove more valuable than they initially seem. And Peter changed his tune on the eBay sellers
very quickly.

THIEL​: In retrospect, it turned out to be this incredibly tight community, a new use case
where the alternatives were much worse. The alternatives were typically using a check
which would take seven days to clear. And because people were both buyers and sellers
on eBay, it had a natural sort of fluidity to the whole thing—where the money went from
one PayPal user to another, and stayed inside the system. It turned out to be quite
powerful. I’d say within three to four months of it being used on eBay, something like
30% percent of the eBay power sellers were using PayPal.

HOFFMAN​: EBay executives were miffed to see us ambushing their checkout counter. Granted,
we made their users happy and accelerated the sales cycle on the site. But, who were we to
siphon off eBay’s business? So began a very strange dance between frenemies.

It kind of reminds me of those unusual animal pairings that you see on a nature show. It’s an old
story—I can almost hear David Attenborough narrating the scene.

“ATTENBOROUGH” VOICE​: The remora eel fastens onto the whale shark by means of
a disc-shaped organ on the top of its head. Once secured to its host, the eel may hitch a
ride across the vastness of the Pacific Ocean.

HOFFMAN​: Incidentally, scientists are still debating whether the remora eel has a parasitic,
harmless or beneficial relationship with its host. That pretty much sums up PayPal’s relationship
with eBay in the early days. In the long run, though, Peter saw trouble.

THIEL​: That was a deeply uncomfortable place to be, though. So I mean it worked but it
was uncomfortable because we were the cash registers, and you had a different
 company that ran the store and they were trying to figure out how to get their cash
register machines to work. And if they ever figured it out we'd be in real trouble.

HOFFMAN​: We knew we were in trouble when eBay bought a rival online payment service
called Billpoint, and directly integrated it into eBay. So much for Peter’s grand escape from
competition. Things were getting heated. But when I remind Peter of this massive threat, to my
surprise, he shrugs it off.

THIEL​: We were certainly not alarmed about eBay initially, because they had not yet
launched the Billpoint product—it got launched after we got started. They bought the
company, but they hadn't done much with it yet.

HOFFMAN​: I remember it a bit differently. EBay scared the dickens out of us—and yes, even
Peter—because I distinctly recall him asking me to sell the company to anyone who would buy it
for $600 million dollars.

HOFFMAN​: I remember our conversations. You were actually at that time fairly
concerned about, people think we have this really valuable thing, but we haven't
established it yet. It's a house of cards right now. This whole thing could blow over.
There was a six-to-12 month period where you had me essentially seeing if anyone
would buy the company.

THIEL​: Right.

HOFFMAN​: And so it's like, “Will anyone buy this?”

THIEL: Right.

HOFFMAN​: “OK, go look for buyers.” There's a funny untold story around if VeriSign had
upped their bid by $50 million dollars, they may have actually owned PayPal, right?

THIEL​: Yes. It's hard to say what would have happened, but certainly there was a lot of
uncertainty around all these things. The name was a good name. It was a friendly name.
You know, how could you go after poor little PayPal? It was just this friendly little
company that was helping customers.

The remarkable thing, in retrospect, was how robust it turned out to be. Maybe the kind
of countervailing advice I would try to give would be that you should try to always do
something where there's an intense use-case, where the customers really like what
you're doing—and that will protect you up to a certain point.

HOFFMAN​: Peter makes a fascinating point here. On the one hand, he says avoid competition.
On the other hand, he seems to concede that competition is tolerable, so long as your
customers have an intense attachment to your product. And it may sound like he’s contradicting
himself—he isn’t.

Here’s how he sees it:

THIEL​: There are companies that are purely competitive, they do not make any
money—think a restaurant. You never want to be in the restaurant business.

HOFFMAN​: I’m sure right now you’re thinking of a restaurant that makes money. Suspend your
disbelief for a moment and hear him out.

THIEL​: And then there are businesses that do not compete—they are monopolies, and
they do very well. And even though this is not the way people want to talk about it on the
inside, you always want to have a monopoly on the inside.

HOFFMAN​: You’re probably thinking, “Don’t we regulate monopolies out of existence?” Well,
yes, the unscrupulous kind. Most people associate monopolies with the robber barons of the
late 19th century. You know the type—wearing a top hat, chomping on a cigar and lounging on
a pile of moneybags. Peter, on the other hand, sees monopolies in the here-and-now. They’re
camouflaged as competitors. Look closer, he says, and you’ll find that even the most classic
examples of competition are not what they seem.

THIEL​: You could say that Coke and Pepsi compete very intensely. On the other hand,
you could say that they're somehow quite differentiated from a brand—so that in
practice, different people prefer Coke or prefer Pepsi, and there actually is a much
smaller set of people who view them as interchangeable products. I think measuring how
much actual competition is happening is not always a straightforward thing to do.
Because just as people want to have monopolies, they want to also downplay
them—and so they will suggest that they're facing enormous amounts of competition
everywhere, whether or not that happens to be true.

HOFFMAN​: Once you think of a monopoly as simply an absence of competition, you might start
noticing a few yourself. What’s a patent, if not a monopoly backed by the government? And
what about those companies that monopolize a market by pursuing a wildly original idea? Elon
Musk’s SpaceX is pretty much the only company on a mission to send people to Mars. Anyone
want to take him on? No? Well, that’s precisely what spurs Elon onward and upward.

You have to invent a new game—seek out a fresh, new field. But you don’t have to go to Mars
to discover new terrain. We sent our producer, Dan Kedmey, to perhaps the most competitive
landscape on earth—the bakeries of Manhattan’s West Village—to see how a baker breaks free
of the pack.
 UMBER AHMAD​: I'm actually trying to get into a remarkably crowded market. People
will look at this and think that I'm crazy. You can't swing a dead cat without hitting a
bakery.

HOFFMAN​: That’s Umber Ahmad, founder of Mah-Ze-Dahr Bakery. You can swing a dead cat
from her front door and hit Patisserie Claude, with its legendary croissants, or Dominique Ansel
Kitchen, where the “cronut”—that’s half croissant, half donut—was born. Competition doesn’t
get tighter than that.

AHMAD​: And so I said, "All right, there has to be a point of differentiation." If if there isn't
an opportunity in a crowded market, then Ford and GM and Toyota and Mercedes and
Tesla and all these other people wouldn't exist in the same market. There is always
opportunity, and I believe that very strongly. I don't believe that you have to be the
singular owner of a market in order to be successful.

HOFFMAN​: Umber knew what she was up against. She’s a former Wall Street banker, and she
knows how to hedge her bets. So she started selling baked goods online.

AHMAD​: I said, "How do I minimize my costs?" And rather than build a million-dollar
space, and build a huge kitchen and all these things, and hope someone will show up, I
said, "Let me figure out if there's even traction here." And so I started with an online
business.

HOFFMAN​: Once she had repeat business, she gained a toehold in a coffee shop.

AHMAD​: And I said, "Where are the people that I care about; where are my customers
shopping today? Where are my customers living?” I went to those brands, and I said, "I
want to work with you.” And one of the first brands was Intelligentsia Coffee. So that was
my first wholesale contract.

HOFFMAN​: And then she took to the skies.

AHMAD​: I was approached by JetBlue Airlines. So JetBlue had just introduced Mint
service—it's like their first class. At the end of the contract, we were packaging pastries
for 22,000 passengers a month. So that, for me, was also a really great way to do two
things: test a large brand partnership, and also figure out what customer conversion
looked like—if we could get customers to convert to us directly through a partnership like
that. So I kept trying to find the partnerships which would gain me access to the
customers that I wanted to become my own.

HOFFMAN​: Along the way, she discovered her point of differentiation. She would never make
anything as newfangled as a croissant crossed with a donut—leave that to Dominique Ansel.
Her​ bakery ever-so-subtly elevates the familiar flavors from childhood.
 AHMAD​: What we really want to do is to have whispers of new things in the pillow of
something that is familiar. A great example of that is our spinach and feta hand pie. It's
kind of like our version of a grown-up Pop-Tart, but it's savory and it's made with sauteed
spinach and Greek feta. But then I season it with za'atar. Za'atar is a spice that is used
very commonly in the Middle East, and so it's somewhat unexpected when you bite into
it—because you're not sure, you're like, “What is that flavor?” And then you think, "Gosh,
it elevates thi,s and it kind of intensifies the experience of the pastry in a way that I
wasn't expecting."

Some of my favorite comments from customers are, "This reminds me of my

grandmother," or "this thing that I grew up with," or, "I was on this vacation, and you're
taking me back and you're helping me remember and experience that." And for me,
that's my dream—because what happens then is I've now created a link, and I’ve
created a connection with you, and I've got you.

HOFFMAN​: She’s got you—as much as a baker can capture a customer. At the very least, she
can go on scaling her business, even as the baker next door invents the hottest new thing since
sliced bread. For her, the goal isn’t so much to break free of the competition, but to differentiate
enough that she carves out her own mini-monopoly. How much do you have to differentiate? It
depends—on the size of the market, the speed of your competition, and your own aspirations
for scale. How big do you want to be?

Umber knows exactly who her competitors are. All she has to do is look at the storefronts
around her. At PayPal, it wasn’t so cut and dry.

eBay ​appeared​ to be our true competitor. And as a startup founder, you’ll often hear potential
investors asking, “Isn’t some gargantuan company on the verge of doing whatever it is you’re
doing?” The presumption being that with all of their money and talent, they’ll squash you.

But the reality is, your most dangerous competitors are rarely the big guys. The big guys, like
eBay, are hesitant to storm the field and fumble alongside you. A fumble for PayPal risked
blowback from a few thousand users. A fumble for eBay, however, could anger users in the
millions, and draw the watchful eye of government regulators. And even if eBay were willing to
take those risks, why would they burn so much creative energy on the online equivalent of a
cash register? Think about it—they’re building the store, a global marketplace for online
commerce. So what if a little company is hijacking the checkout counter?

So while we were wringing our hands over eBay’s new payment system, we also were
encouraged to see that they took more than a year to roll out Billpoint.

And now we get to one of Peter’s key ideas on escaping competition. It’s the central idea that
drove not just PayPal’s success, but nearly every successful scale company.
 THIEL​: We needed to achieve escape velocity. We needed to grow so quickly that it
would discourage anybody from even trying to compete with us. And so if you could
scale incredibly fast—on the one hand, you have to race really hard to scale fast, but the
benefit if you do it is that you're achieving escape velocity from the black hole that is
hyper-competition.

You could start in something that's very competitive, but then over time, get to a place
that's less and less competitive. Amazon was incredibly competitive. But over time, it's
becoming more and more of the retail monopoly. And that's why people value the
company so highly—because when they look into the future, they envision Amazon
having destroyed all other retail stores and making all the profits.

HOFFMAN​: Now this is a big idea: escape velocity. How do you know you’re hitting it? Peter
has a formula.

THIEL​: I used to have this equation on the PayPal whiteboards: U sub T=U sub 0; E to
the XT—where U sub 0 is the initial users, U sub T is the users at time T, and E to the
XT is the exponential growth factor. And X is, if you get X up, the exponent rises even
more quickly.

HOFFMAN​: Yes, he did just recite that equation off the top of his head. You don’t have to
understand any of it. The equation simply helps Peter detect whether users are growing
exponentially. It comes down to what Peter calls “the X factor.” Translation: watch for
exponential growth.

THIEL​: The X factor in the exponent was growing at about something like seven percent
a day—and even when you start with only 24 people, the compounding dominates. And
so, you go from 24 to 1,000 by mid-November. We were up to 13,000 by end of
December ‘99. By early February of 2000, we were up to 100,000. By mid-April of
2000, we were up to a million.

HOFFMAN​: If you’re wondering how Peter remembers every date and every metric from 17
years ago, your guess is as good as mine.

Maybe it’s because the daily movement of those numbers hinted at a radically altered future for
our company. Exponential growth is simple to grasp, but really hard to believe in. The sooner
you can detect it, the better you’ll understand whether you’re hitting escape velocity. Think
about the moment Peter detected our blistering growth rate. We had only 24 users. Every day,
they grew by seven percent. If the trend held, we could break free of every competitor in the
span of a few years. In short: eat dust, eBay.
 THIEL​: There's an Einstein line—it may be apocryphal, maybe Einstein didn't actually
say it—but it's to the effect that compound interest is the most powerful force in the
universe. And so there was this question, “How do we get some sort of powerful
compounding to work?” And we concluded that linking money with email, and maybe
giving people some money to accelerate the process, would really get it started. It made
for a very crazy ride.

HOFFMAN​: This underappreciated rule of compound growth is why Silicon Valley seems to
spawn so many overnight successes. It’s why investors pour hundreds of millions into a wisp of
a company. So long as your startup is hitting escape velocity, anyone who understands the
power of compound growth will keep funding you. And most of those investors tend to reside in
Silicon Valley—because they’ve seen compound growth with their own eyes, and they believe it.

Take, for example, the time that Peter and I invested in Facebook. We weren’t blown away by
Mark Zuckerberg’s pitch, as we recalled.

HOFFMAN​: I don't know if you remember two features of that meeting which were pretty
funny. Zuck's grown into his articulateness; he's very articulate now. But back then, there
was a lot of staring at the desk, not saying anything. So, what are the right words to say?
Well, Zuck didn’t say very much. The second part is, remember he said, “Well, if you
don't like this one, I have this other business, Wirehog.”

COMPUTER VOICE​: Wirehog was a file-sharing service created by the Facebook

founders.

HOFFMAN​: Do you remember the peer-to-peer file distribution?

THIEL​: Yes.

HOFFMAN​: Get rid of that!

THIEL​: Not interested.

HOFFMAN​: So why did we invest? The X-factor. Facebook expanded from one college campus
to the next at a speed that was unprecedented among his competitors, like Friendster or
MySpace. We still had a million questions about whether the network could ever break out of
college campuses and spill into the wider world, but there was no denying that Facebook’s user
engagement was unreal. If memory serves me right, when Facebook launched to a new college
campus, within six weeks 80% percent of the students were essentially using the service. And
by using the service, I mean they checked it more than four times a day. That X-factor mattered
more to us than whatever Mark said—or didn’t say—about his business.
 THIEL​: The story I always tell was that you always have this Shark Tank image of
this—and, “What did they say,” and, “What were the right magic words to use to get
money?”

And I think the answer was much more that the two of us—and maybe you, more than
me—had done our homework for at least a year, maybe a decade before that, and were
primed to invest. And that's actually what you want to be able to do.

HOFFMAN​: Suppose you’ve hit escape velocity. User growth compounds by the day. Investors
back you in round upon round of financing. You’ve mastered a game of your own making.

Now, the pressure is on to not just gain a competitive edge, but to escape the competition
entirely.

The very same force that enabled you to secure huge sums of capital will compel you to spend
at an alarming rate. If you want to break free of your competitors, get ready to burn money.

THIEL​: We had a burn rate north of 10 million a month from March to September of
2000. That was pretty uncomfortable.

HOFFMAN​: Yes, you heard that right. We spent upwards of $10 million dollars a month. You
might think that making sure your business has a steady stream of cash should be a priority. But
when you face intense competition, you often have to ​spend​ to leave your competition far
behind. And you might have to spend a ​lot.​

In Silicon Valley, competition can be downright lethal. Think all of the late ‘90s search engines.
Remember AskJeeves? HotBot? Infoseek? Direct Hit? Then Google comes along, and it was
like, “Nope, that’s it. No soup for you.”

And that’s just the nature of the game. The stakes are neatly summed up by my favorite line
from the movie Glengarry Glen Ross: “First prize is a Cadillac Eldorado. Second prize is a set of
steak knives. Third prize is you're fired.” Except in Silicon Valley, it’s usually first prize is the
whole Cadillac dealership, second prize is you're a footnote in history.

And that’s one reason Peter agreed to run a costly experiment that was pretty much unheard of
at the time. Most companies paid advertisers to reach users. We took a more direct route—we
paid the users themselves. If an existing PayPal customer referred our service to a friend, they
each got $10 dollars online cash, on the house. Peter wasn’t exactly gung ho about this idea.

Here’s why he decided to pay users, despite his misgivings.

THIEL​: We had to get to scale as quickly as possible. And if we didn't get to scale,
maybe somebody else would beat us, and we wouldn't achieve escape velocity. And we
 didn't know that there would still be a rapid organic growth, even when we stopped
giving customers the referral bonuses, for example. And then similarly, I also thought
that we either could get to scale or figure out our business model. So we should get to
scale and then see if the business model worked, rather than see if the business model
worked and then scale it.

HOFFMAN​: Yes. And burn rate, and exponentiating, free credit—

THIEL​: It was exponentiating. Certainly there were no revenues yet.

HOFFMAN​: Because the funny thing is there's a flip side, which we’ll go into in a little bit,
of the positive exponential curve. But the negative exponential curve was one of the
things that we were also—

THIEL​: Well, there were both. It was exponentially growing users, and exponentially
growing costs.

HOFFMAN​: Yes, exactly.

HOFFMAN​: Plenty of wildly successful businesses defer profitability for years. Amazon chugged
along for roughly two decades, ignoring the occasional gripes from Wall Street that their whole
operation seemed to be a money pit. In fact, they were breaking free of their competition in one
retail sector after the next.

You’d think just as PayPal was hitting its stride, we’d also rest easy. I wish. At no point did we
say to ourselves: “Relax, Peter. We’ve hit escape velocity. Sign that $10 million check already.”
In fact, we worried without end.

Our concern was grounded in a humbling truth: escape velocity is not a fixed speed. It’s always
and forever relative to your competitors. Your fastest competitor determines how hard you hit
the gas.

Peter suspects the majority of Silicon Valley startups could gun it a little harder.

THIEL​: Post-2000, the main post-mortem was that you shouldn't scale too quickly. And
you had to do it fast, but not too fast. And if you think about businesses that have failed
because they scaled too quickly, there have been very few post-2000—I think there
have been a few companies I can point to in the last one or two years. So perhaps as of
2015-2016, people finally got over the hangover from ‘99-2000. But if you think about
scaling, there's obviously a lot of businesses that scale too slowly. You’d expect there to
be a lot that are scaling too fast—and it's striking how few have scaled too fast in the last
17 years.
HOFFMAN:​ So how quickly can a competitor sneak up on you? Brian Chesky, the co-founder
and CEO of Airbnb, has a cautionary tale. Now, Brian invented a wildly new game that was so
strange, he really didn’t have a single competitor.

If you listen to Masters of Scale regularly, you may recall my initial response to Airbnb—and the
idea that strangers would open their homes to other strangers.

HOFFMAN​: Oh, someone’s going to rent a couch or a room from someone else? Who
are the freaks on both sides of that transaction?

HOFFMAN​: Bear in mind, this is coming from the guy who ​invested​ in Airbnb. Fortunately, the
people on both sides of that transaction weren’t freaks at all. And now you can find them in just
about every city around the globe. Brian and his co-founders had basically invented the eBay for
extra rooms and empty homes. And as the new mover in that space, Airbnb scaled fabulously.
Brian thought he had hit escape velocity around the middle of 2011. They had users. They had
investors. They had no competitors. And then, as inevitably happens, they did.

BRIAN CHESKY​: And then all of a sudden, we had gotten cloned. So we had to expand
really fast internationally.

HOFFMAN​: By “cloned,” Brian means websites that had cropped up across Europe and Asia,
that looked and worked a lot like Airbnb. They were backed by a behemoth of a company,
Rocket Internet, based in Germany. Brian recognized the competitive threat, thanks to some
sage advice from Michael Moritz, a partner at the venture capital firm, Sequoia. Brian and his
co-founders invited Michael to their headquarters to discuss Airbnb’s expansion strategy. Back
then, Airbnb’s “headquarters” was just a dingy apartment with a no-shoes policy.

CHESKY​: We make him take his shoes off—it was the funniest thing. He's like, "What?"
He's used to going to these offices; he has to take his shoes off in our apartment to meet
with us. We had to get advice from him. We had two choices for international
expansion—we could either go to the football cities, or international expansion. The
football cities are basically, where in the United States are like small, medium to large
cities with a football team?

And we can expand to St. Louis, and Baltimore, and Boston, Chicago. Or we could do
something else. Michael Moritz said, "Plant flags." “What does that mean?” He said,
“Pick the most important markets in the world, and imagine you lost them. Which ones
couldn’t you lose?” And we thought, "London, Paris, Barcelona"—we kind of stayed in
Europe, Asia was maybe a later chapter. “Rio.” And so we started planting flags.

HOFFMAN​: I saw just how quickly Brian planted flags across Europe. He literally hopscotched
from one European capital to the next, scrambling to get users on his site.
Ultimately, a wildly original idea only buys you a grace period from the competition. As soon as
it works, you have a target on your back.

And in the early 2000s, PayPal was an increasingly juicy target for eBay. They did all sorts of
things to rattle us, like a promotion with Visa that made it free for sellers to accept payments
from credit cards. And who knows? Maybe one day they would have just booted us off the site.

That day never arrived, and it’s because we found the ultimate escape plan. We sold PayPal to
eBay for $1.5 billion dollars, and got out of the online payments competition. Why?

If you ever do invent a new game, fumble through it, master it, grow it at an exponential rate, hit
escape velocity—even after all of that, you might still come crashing back down to earth.
There’s a much older adage that you should always have in the back of your head: If you can’t
beat ‘em, join ‘em.

And after all that hard work, it can a bitter pill to swallow. Just sell your company? We still
question the decision.

HOFFMAN​: Do you have any additional thoughts on whether or not selling to eBay was
a good idea or not?

THIEL​: Well, I think it was still the right idea, because there were so many regulatory
constraints on the business, and we were not really achieving escape velocity from
eBay. You know, eBay was growing fast. We were growing on eBay. So we're growing
maybe 100% percent annualized on eBay. And so to diversify away from eBay, we had
to grow the non-eBay business by more than 100% percent a year. And I think that was
extremely hard to do.

HOFFMAN:​ We’ll never know whether eBay would have gained on us. Maybe we could have
achieved escape velocity. Or maybe we could have held out for more growth, or a higher bid.
The PayPal founders to this day have differing opinions—and I don’t claim to have the right
answer.

But one thing we did learn from that experience is that competition is just a drag. As investors,
Peter and I both look for that founder who aspires to break free as much as possible. As Peter
says, he always comes back to a fundamental question: will this founder reshape the future?

THIEL​: I've gone back and forth over the years how much is the people, versus the
technology, versus the business strategy. But if you ask people what they are trying to
do, and if it's not that ambitious, and if they're not trying to win in that significant a way,
that's probably a relatively bad sign.
 And then, of course, if it's ambitious, then you have to calibrate how realistic it is—and
maybe it's always a little bit unrealistic. There's a lot of calibration around that, but
there's something around that that I think is very underestimated, where the future is the
future that we will. We decide what future we wish to create. And if you want to ask what
kind of future is going to happen in a given company, you just ask the people—and they
will tell you, and you all need to do is ask.

HOFFMAN​: So my version of that is you have a very ambitious future, you have an
ambitious goal, and you at least have a plausible theory about how you get there. It's not
just, “We will get there.” It's, “This is what I recognize the path looks like, these are some
of the risks, these are some of the techniques.”

THIEL​: Yes, that's a good one. The bad patterns tend to be either no ambitious future, or
winning the lottery—ambitious desires, but no pathways.

HOFFMAN​: These people who want to reshape the future, but also understand how hard it is to
get there, and plan accordingly—they’re exceedingly rare. Most of the things you imagine about
the future are wrong. And that’s why people tend to vie for excellence on the same well-worn
playing field. There’s a deep comfort in knowing the rules of the game—and no harm in it,
either, if that’s your thing.

But if you stop for a moment and realize that you can’t find a single member of the herd you
aspire to be, then perhaps that’s the first sign that you’re ready to break free of the competition.
And to that I say: “Game on.”

I’m Reid Hoffman. Thanks for listening.

Masters of Scale Episode Transcript: Reed Hastings

REED HASTINGS:​ The horse was the dominant form of human transportation for about
5,000 years: domesticated in Kazakhstan, 3000 BC.

REID HOFFMAN: ​That’s Reed Hastings, the founder and CEO of NetFlix. You might think he’s
giving an elevator pitch for a NetFlix Original—like Marco Polo, but without the blind Taoist
monk. He’s actually revealing the foundational strategy that drove the company’s success. He
starts the story on the plains of Kazakhstan and moves pretty quickly from there.

HASTINGS:​ The horse was the dominant form of human transportation for about 5,000
years—domesticated in Kazakhstan, 3000 BC. So for 5,000 years, if you wanted to
make a contribution of personal transportation, it was a better saddle, better breeding,
better hooves.

And then in one generation, from 1900 to 1930, everything changed with the internal
combustion engine.

HOFFMAN: ​What Reed Hastings understands—with such clarity—is that technological shifts
don’t​ always happen incrementally. Sometimes, they burst over your head like a thunderclap,
and wipe away habits that have lasted thousands of years.

HASTINGS:​ And the trick is to realize, those are pretty rare.

HOFFMAN: ​So sometimes innovation happens fast—and that’s the kind of change we typically
aim for in Silicon Valley. But more often, innovation happens slowly. And Reed Hastings knew
early on that NetFlix needed both kinds of innovation. They started by sending DVDs in the mail,
and evolved into a streaming video service with original content.

HASTINGS:​ Much of the time, the right strategy is to improve what you've got, and then
some of the time, everything changes—and correctly recognizing the differences there is
really important. Humans are inventing faster and faster, and that does mean that the
typical business model is shorter lived than it would have been before. So I'm not
expecting Internet streaming to be 5,000 years, like the horse. But it may be like the
automobile, where it's 100 years or more.

HOFFMAN: ​Now that’s the sort of foundational insight that not only drove NetFlix strategy, but
also defined their culture. Here’s why: Reed could see that he needed a team that could
develop a first-rate logistics operation for shipping DVDs. And at some point, that same team
would have shed all of that logistical expertise and build an online streaming service from
scratch. So who the heck can make that leap? Certainly not someone who’s worked in a
mailroom for 50 years, and developed an expertise in shipping little red envelopes.
Reed knew he needed flexible problem-solvers who could change with the times, and he built a
company culture ​for​ and ​with​ them. It’s a great example of why I believe there are many good
company cultures and many bad company cultures, but a winning company culture emerges
when every employee feels they personally own the culture.

[THEME MUSIC]

HOFFMAN: ​This is Masters of Scale. I’m Reid Hoffman, co-founder of LinkedIn, investor at
Greylock, and your host. And I believe that a strong culture is critical to companies that hope to
scale. But truly strong company cultures emerge only when every employee feels they
personally​ own the culture.

And by strong culture, I don’t mean authoritative. Quite the contrary. A strong culture should be
a true articulation of how your employees work at their best. It should be grounded in your
shared mission—the thing you’re actually trying to accomplish. It should be understood by
everyone and built by everyone. And it should start from your earliest days as a startup.

But the question remains, how do you get everyone across the org to share your values, without
stifling diversity and hiring in your own image? And trickier still, how do you spread those values
when you’re hiring new employees by the hundreds?

On today’s episode, I’m going to talk with Reed Hastings, the CEO of Netflix, about his journey
from a dysfunctional culture in the first phase of his career, to the high-performing culture he
nurtures at Netflix. At times, you might find it a bit awkward that Reed Hastings and I have
almost the same name.

But we’re going to push past that. As the episode continues, I’ll simply refer to him as “Reed.”

We’re going to come to the Reed Hastings story in a moment. But I want to start at the
beginning here. If you want to build a strong culture, the first thing you have to do is open your
eyes. You have to start observing your culture the ​instant​ you arrive at the office—as soon as
you walk through the front door.

Margaret Heffernan, former CEO of five companies, can spot the warning signs in just a few
paces from the front door to the front desk.

MARGARET HEFFERNAN​: When you walk into a company, you instantly learn a huge
amount. I can think of one company that I do work with in Switzerland, where they have
outsourced the receptionist—and all I can tell you is that that cultural marker, which is,
“We don't really care about the people who walk through our front door,” pervades
everything about the way that they treat people in that company.

There are all sorts of cliches and truisms about first impressions. But actually, what you
 see when you're walk in is almost always what you get when you get to know the
company better.

HOFFMAN: ​So as the world’s lone expert on reception desks, I had to ask Margaret: What’s the
friendliest reception she’s ever received?

HEFFERNAN: ​I can think of a company in San Francisco that I've written about a lot
called Method home care products, where the founders and senior people in the
company actually take turns being the receptionist, because they want to know who is
coming to see them.

HOFFMAN: ​At this remarkably welcoming company, the leadership team doesn’t just hand their
employees manuals on how to behave—neither are they passive observers. They embody their
cultural principles. I believe that a healthy culture emerges only when every employee, from the
CEO to the receptionist, opts into the culture every day. The cultural principles themselves can
change over time.

They can vary from company to company, and they can strike outsiders as really bizarre. That’s
all fine. But the one thing must remain constant: your staff must truly believe in your office
culture.

It’s best to start thinking about this when your team is small, and the culture is still malleable. A
company’s culture cements very quickly. So as you grow, you have to be very careful about
what it is you’re scaling. You can get away with a lot more when when your staff is teeny—say,
two or three people.

And that’s ​exactly​ the sort of team Reed Hastings was leading back in 1991. Long before he
had founded Netflix, he was a programmer. Reed, along with two of his colleagues, invented a
debugging tool for other programmers. They called it Purify, and it was a hit. That’s when things
got messy.

HASTINGS​: And on the back of one niche idea like that, was able to start a
company—Pure software. First round of funding was family and friends—20 people by
20K—to be able to get an office and start selling.

And then we doubled every year. And it was in one way tremendous—Morgan Stanley
took us public in 1995, we acquired all these companies. But in another way, it was
terrible, because we got more and more bureaucratic, less and less inventive, less and
less fun. And it was that classic, “Company got soft and political as it got bigger.”

HOFFMAN: ​Consider what Reed Hastings was up against. He was a programmer, not an
experienced executive. He was acquiring companies, which means whole teams, with their own
hardened working habits, were slapped together. At one point, his company, Pure Software,
acquired three companies in the span of 18 months. And as the culture eroded, Reid had a
solution—of sorts.

HASTINGS​: Well, I had the early idea that if anything was wrong, I could just work a little
harder to make it right. And so I was coding all night, trying to be CEO in the day, and
once in awhile, would squeeze in a shower. And it turns out that's not a good recipe for
leading a large group of people.

At the time, I thought if I could just do more sales calls, more travel, write more code do
more interviews, that somehow it would work out better. I don't think I ever really
escaped from that, until the company got acquired by our largest competitor in 1997, six
years after starting. And it was only then, in afterwards processing what had happened,
that I was able to get some perspective on it.

HOFFMAN: ​So Reed made a very typical mistake in his first company. He thought he could
solve his company’s problems just by working harder.

But hard work isn’t enough, and more work is never the real answer. To succeed as you scale,
you have to leverage every person in the organization. And to do that, you have to be very
intentional about how you craft the culture. This was exactly the lesson Reed took from Pure
Software. Their management decisions had created a culture that rewarded the wrong behavior
and retained the wrong employees.

HASTINGS: ​Well, the mistakes in Pure was that every time we had a significant
error—sales call didn't go well, bug in the code—we tried to think about it in terms of,
what process could we put in place to ensure that this doesn't happen again, and
thereby improving the company? And what we failed to understand is by
dummy-proofing all the systems, that we would have a system where only dummies
wanted to work there, which was exactly what happened. And so the average intellectual
level fell, and then the market changed, as it inevitably does. In that case, it was C++ to
Java, but it could be anything.

And we were unable to adapt to it, because we had a bunch of people who valued
following the process rather than the first-principle thinking.

HOFFMAN: ​Notice Reed’s double insight here. Pure Software couldn’t adapt because they had
the wrong employees, and they had the wrong employees because of management decisions
that explicitly selected for those employees. It was an insight that catapulted him. Pure Software
sold for $750 million dollars. That gave Reed the seed money to launch Netflix in 1997.

It started as a service that mailed DVDs to your door. And it’s easy to forget just how radically
Netflix upended the video rental business from day one. No late fees. No extra shipping
charges. Lose a DVD? Get a new one in the mail, no questions asked. Their most fearsome
competitor, Blockbuster, quickly followed suit, matching service for service, but not quite fast
enough.

Blockbuster filed for bankruptcy in 2010, and shrunk from 9,000 stores at its height to roughly 10
stores today, 8 of which are reportedly in a frigid part of Alaska with sluggish Internet service.
Score one, Netflix. But there’s a deeper reason Netflix was able to outmaneuver a company
more than 100 times its size. It’s not a story of competition, but cooperation—a cultural
flourishing that took place within Netflix’s headquarters. It was a culture built almost as a
counterpoint to Pure Software.

HASTINGS​: we were unable to adapt to it, because we had a bunch of people who
valued following the process rather than the first-principle thinking.

HOFFMAN: ​A bit of background on first-principle thinking—you’ll hear this expression a lot in

Silicon Valley. First-principle thinking is the idea that everything you do is underpinned by
foundational beliefs—or “first principles.” Instead of blindly following directions, or sticking to a
process, a first-principle thinker will constantly ask, “What’s best for the company? And couldn’t
we do it this other way instead?” And these are the kinds of inquisitive minds that Reed
Hastings wanted to unleash on Netflix, for virtually every decision.

HASTINGS​: And so the reverse of that, which we do at Netflix, is you have to be a

first-principle thinker. There's an overhead to that, about what's best for the company. So
this is true on the broad scale, like what kind of content we do. It's also true in the micro,
which is, “How should I travel, business, or coach, or by bus?” And we asked people to
do what you would think is best for the company. We don't give them any more
guidelines than that.

And some people that frustrates, but those are probably not the people that's a good
match for Netflix. And other people like this sort of first-principle thinking all the time.

HOFFMAN: ​This may sound like the sort of advice a tech entrepreneur would naturally follow.
Who wouldn’t want to hire a first-principle thinker? Well, it’s easy to tell yourself that in the
abstract. But when you’re running a fast-growing company, you’re also going to be telling
yourself, “I desperately need a sales expert, a programmer, a designer, an accounting
wiz”—and you’ll find applicants who have resumes with all of the skills suited for that moment.

It’s all too tempting to tell yourself, “Well, we’ll find a first principle thinker with the next hire.” Just
look at what happened to Reed when he was at Pure Software. He’s a first-principle thinker.
You’d think he’d hire other first-principle thinkers. Game recognizes game, right? And yet he
neglected that hiring standard—for ​six​ years. That is why you must define your culture ​before
you scale. And you have to think deeply about what cultural attributes you want to preserve at
scale.
Reed gave this a lot of thought in the founding days of Netflix. He wasn’t just looking backwards,
at the lessons learned from Pure; he was also looking ahead, where he saw an enormous threat
to the company. Forget Blockbuster—how would Netflix survive the dawn of online streaming?
Broadband Internet was making its way into households across the US. It seemed inevitable to
Reed that streaming entertainment would eclipse DVDs, just as surely as the combustion
engine eclipsed the horse and carriage.

And here’s what makes Reed such a fantastic strategic thinker—he was fretting about this in the
late ‘90s, when broadband Internet had reached fewer than one in 10 households.

To comprehend why Reed hires first-principle thinkers at Netflix, you have to remember how he
views these technological shifts. Innovations generally happen incrementally—except for those
moments when everything dramatically changes. And then everything moves slowly again.

HASTINGS:​ If we continued to refine DVD-by-mail for another two decades, that would
have been a failure strategy, because the underlying substrate was changing, and
Internet delivery was becoming possible. But now that we’re in Internet delivery, we think
that Internet television is going to be a 50 or 100-year paradigm. And so now our focus
should shift to be, how do we do better and better on the core?

HOFFMAN: ​Reed’s knowledge of history, the changing nature of technology and the historical
moment he was in, led to the understanding he would need people to change with the times.

People who could rip up a process, and return to the first principles of delivering entertainment
by any means necessary—whether it’s horseback, mail, fiber optic cable—or maybe in the
future, Elon Musk’s neural lace. Regardless, you need people who can change the business
model—fast.

So how did Reed identify those candidates? It started with a now-legendary document at Netflix:
a collection of more than 100 slides known as the “culture deck.”

These slides defined exactly what the Netflix culture stands for, and who they’re trying to hire,
and what they can expect.

HASTINGS: ​The culture deck started about 10 years ago. So first couple of years, we
were just focused on survival, then we got public in 2002, cash-flow positive—and it was
clear we were going to survive. So we then started really thinking about the
culture—what we wanted to be, how we wanted to operate. And so over successive
years, I improved this deck which I would go through with new employees. And
sometimes those new employees would love it, sometimes they were like, “Oh my god,
why didn't you tell me this before I started?

“That doesn't make sense to me.” And so we realized we should give it to every
 candidate. And so then about 2007, 2008 we did that by posting it on SlideShare. But
again, it was really just to be able to send a link to the candidates. It's not very pretty, it's
not very highly designed, doesn't look like it's an external marketing piece, but that
authenticity, really, people liked in the outside world, and now it's over 10 million views
on SlideShare, and continues to be studied around the world.

HOFFMAN: ​And what were the unexpected benefits of having published it?

HASTINGS: ​Well, let's see—the core benefit, which we did expect, was that candidates
were very aware of the culture. The unexpected benefit was, many people became
candidates for us, because they loved that—what we described in terms of freedom and
responsibility—that might not have otherwise thought about us.

HOFFMAN: ​Here’s the fascinating thing about Netflix’s culture deck. It’s not meant to appeal to
every job seeker. In fact, it’s meant to ​repel​ some job seekers.

HOFFMAN​: One of the things that I think that shocks people about the Netflix culture
document is they say, “Look, adequate performance should get you a severance
package.” What's the way that you both create that high performance, but also doesn’t
feel too dangerous to people?

HASTINGS​: Yeah, we try to always emphasize honesty—so you can always ask your
manager, “Hey, if I were leaving, how hard would you work to change my mind to stay?”
That’s sort of the acid test—I would call it the “keeper test.” So we encourage people to
check in with their manager on that.

So we try to be very thoughtful, so it should be that there's no surprises about that—and

we all aspire to excellent performance, and there's no short-term judgment, or like, “Last
week you made a mistake, and so you're out.” It's not like that at all. It's about, really, the
expectation of future contribution, which is based on a range of factors and performance
to date.

HOFFMAN: ​This keeper test may sound a bit Darwinian. No one wants to hear a manager say,
“I wouldn’t fight to keep you. Thanks for playing.”

But I actually believe it’s more compassionate to ask this question, repeatedly. You have to be
thoughtful about who fits in, and who clashes with their coworkers. Suppose a manager decides
to keep a brilliant jerk on the team. Morale sags. The team’s performance drops. Then you have
a truly Darwinian struggle on your hands. And in that sense, the keeper test cuts both ways. A
manager can fail it as surely as any employee. That’s why a commitment to culture must
pervade every decision.

Without a clear sense of how staff should work together, it’s all too easy for managers to narrow
their focus on individual players. And emphasizing individual performance, at the expense of the
team, can be downright hazardous to an organization, as Margaret Heffernan has observed.

HEFFERNAN​: There is often a belief among very successful, very competitive people,
that the thing you want to do in a company is get everybody to compete with each other.

That if it's “Everybody’s racing against everybody,” you'll have this kind of white heat of
brilliance and creativity. And I think pretty much everything about that's wrong. And that's
not to say that I'm not competitive—I'm deeply competitive with myself, in the sense that
I really want to do a better job today than I did yesterday. But I don't want you to fail. And
I have seen more companies and organizations go wrong, because of what I think of as
negative competitiveness.

“I do want you to fail,” or, “I want your department to fail,” or, “I want your product to fail,
because that will make me shine.” I've seen more damage and destruction and waste
from that mentality than probably from any other misunderstanding. If you can build an
environment in which people really want to help each other, full of people who are
generous, you will do infinitely better than creating some kind of Olympic sport within the
company.

HOFFMAN: ​Here we come to the essence of a strong culture. It serves as a check on selfish
ambition. It’s a civilizing force that excludes anyone who will drag down the team, and also
welcomes anyone who elevates the team. In short, it’s warm, but not cuddly. And if that sounds
a bit paradoxical, Reed Hastings has a clarifying analogy.

You’ll never hear him refer to his colleagues as a “family.” It’s a term that visibly grates at him.
He likens Netflix instead to a sports team—they expect high performance from their players, and
they use internal collaboration as a tool to drive external competitiveness.

HASTINGS:​ In team sports that really succeed, there often is a lot of warmth between
the players. And so it's emphasizing those aspects, and demonstrating that when people
come in, everyone tries to help them.

But ultimately, it is about performance, unlike a family, which is really about

unconditional love. Even if your brother does something awful and goes to jail, your love
doesn't stop. And that's just a different and important part of society, but that's not what
we're about. What we're about is collectively changing the world in the areas of Internet
television, and that takes incredible performance at every level. We're also about really
honest feedback all the time, so you can learn and be the the best that you can be.

HOFFMAN​: Are there any company cultures that you think should do family versus
team?
 HASTINGS:​ I suppose a family business—it's a way of providing an income to a family.

HOFFMAN​: So if it’s family already, why not.

HASTINGS​: It’s a family already. But no—I mean lifetime employment, unconditional
support, no matter what the performance is. I don't see how that makes sense for
organizational excellence and contribution to society.

HOFFMAN: ​So let it be known that Netflix does not promise unconditional love—and they’re
exceptionally frank about this in their culture deck, which every prospective employee reads.
This has become a powerful tool for them—one that creates a built-in filter to every hire. It’s a
great hack that other companies would be smart to adopt. Because the hiring process is a
critical—but often overlooked—part of maintaining company culture. When you’re growing and
hiring fast, it’s easy to place expediency over excellence.

You’ll often find yourself tempted to hire perfectly-qualified candidates, who you know—in your
gut—are ​not​ a fit with your cultural values. My strong advice: Resist.

HOFFMAN: ​So how do you resist the urge to hire a candidate who is brilliant, qualified, perfect
in every way—with the sole exception that they might clash with the company’s culture? I asked
Jeff Weiner, the CEO of LinkedIn, how he does it. “With reluctance,” he told me—until he saw
the consequences of the decision.

JEFF WEINER​: As the organization grows in success, you're going to have a lot of
demand for your products, and you're going to need to hire quite rapidly. And as a result
of that, you're going to be bringing people into the organization that are less familiar with
the founding DNA, what it was you're trying to accomplish.

I remember early on in my tenure at LinkedIn, we were around the table. Call it a hiring
committee, a small group of people responsible for evaluating new prospects. We were
evaluating some LinkedIn profiles, and there was one profile in particular for a very
important role, and the person who was sponsoring this prospect said, “Look at this
profile, look at the background, look at this experience, look at the skill set. I mean, we
couldn't find anyone better. I should warn everyone, I don't know that they're the right
kind of cultural fit for us, based on the following. But we'll make it work.”

And inevitably, when you try to pull that off, and you kind of rationalize to yourself that,
despite the fact you know there is this misalignment, you'll make it happen—inevitably, it
almost never does. And it becomes very expensive in terms of time, energy, and even
resources working through that, and trying to rectify those situations.

Fast forward about six to nine months, and we were around the table—very similar group
of people, evaluating somebody’s profile, and someone said, “Check out this profile, look
 at this background, look at this set of experiences and skills, just unbelievable. But
they're not a cultural fit, so let's move on to the next candidate.” And that's when you
know you're in a position where you can scale—especially when that discussion is taking
place and you're not in the room.

HOFFMAN: ​Notice how Jeff points out that this willingness to reject A-players has to persist,
even after he leaves the room. Some CEOs, like Aneel Bhusri, co-founder and CEO of
Workday, refuse to leave the room until the team has made this decision so many times, it’s a
reflex.

ANEEL BHUSRI​: You know this well, Reid. In the early days, it's just you, and a few
other people, so we just did it ourselves. We set out to interview the first 500 people.

HOFFMAN: ​To be clear, by “we,” Aneel means he was personally involved in interviewing the
first 500 hires for cultural fit.

BHUSRI​: After our hiring managers had identified people, and put them through the
process for skills, we would then interview the individual at the last stage, and it would be
purely about cultural fit. And we would test on whether they were an “I” person or “we”
person—we were looking for “we” people, we were looking for people that had a clear
driver for why they wanted to be successful. We were looking for people that were high
integrity. We were looking for people that did not job-hop. And you could look at a
resume, you can tell if they’re the shiny, new-penny type that jumps from one op to
another. We were looking at people that were going to be with us for seven, eight, nine,
10 years.

We just did a town hall a couple days ago, and we’ve got tons of people who have been
with us ten years. And that's how you build a great company. So I was interviewing those
first 500 people.

HOFFMAN​: And it's somewhat obvious from this, given that you set up that initial
culture, but how then, past the first 500, did you help keep that?

BHUSRI: ​Well, we kept interviewing people after the first 500, but we armed those first
group of people. We decided—I think it was at a company meeting—to say, “OK, now
you guys are on the hook. You interview the next 5,000. Make sure the next 5,000
people are great cultural fits.”

They still, to this day, take that role very seriously as ambassadors of the culture.

HOFFMAN: ​I want to acknowledge the risk of this conversation. A strong culture is great for
team performance—but you also run the risk of defining your culture so narrowly, that the
founding team starts hiring in their own image. And if your founders are a bunch of young, Ivy
League white guys hiring other young, Ivy League white guys, you’re not just being
biased—you’re being foolish. You want a strong adaptive team, you need different perspectives.

Tristan Walker, the founder and CEO of Walker and Company, considers the diversity of his
staff a strategic advantage. They’re hard at work developing health and beauty products for
people of color, which his competitors mistake for a niche market. It only looks niche when
you’re surrounded by white people, he argues. His competitors’ oversight is his team’s
opportunity.

TRISTAN WALKER​: So how do we come up with ideas and idea generation, et cetera?
We have an innovation pipeline that's three, four years long.

But a lot of those ideas start with ourselves, because we're part of the community we're
serving. This goes back to some of that strategic advantage. I feel like the diversity of
our company needs to reflect the diversity of America, the diversity of the world. And out
of that comes innovation and ideas that are fresh and new.

HOFFMAN: ​It’s a sentiment echoed by Mariam Naficy, founder and CEO of MInted, a site that
sells home decor from independent designers around the world. She invites designers to submit
their best works through a crowdsourced competition. And she knows from experience that
great design is tucked away in nearly every market of the world, just waiting to be discovered.

MARIAM NAFICY​: So my dad was with the UN. He is an economist—development

economist—and so we would move every time he got a new assignment. So we were in
Kuwait, then Lebanon, and we were there when the war started. Then Tanzania, which
was stable, Iran—so I was there during the revolution—and then Egypt. And then,
actually, I got exposed to a lot of design, architecture, and style that really influenced me.
And I didn't realize how much it did, until I started Minted. I saw things in Iran, for
example, that are hard to get to now.

I would go through bazaars with my mom. And my mom is Chinese, my dad is Iranian.
We would haggle our way through markets a lot.

HOFFMAN​: And how did that diversity of international cultures and perspectives help
prepare you for thinking about, “We're going to do design competitions, we’re going to
crowdsource design, we're going to create a range?”

NAFICY​: You realize the breadth of perspective that is actually out there, that we don't
necessarily have access to as consumers here—that really helped me. I think also, I
really believe different people have different aesthetic tastes, and you need to be able to
address them.

And the best way to address them is really by tapping into global creativity.
HOFFMAN: ​I only bring up these examples because they underscore the hidden costs of a
whitewashed office culture. You can scale a product to the world without looking like the world,
to be sure—but the slightest misconceptions you have about your customers translate into
missed opportunities for your business. And as an investor at Greylock, we look for a range of
diversity on the team and on its board.

We have worked with recruiting groups and all kinds of organizations, like Sheryl Sandberg’s
Lean In ​movement, to close the gaps. But I don’t claim to have a silver bullet. At the very
minimum, everyone should be playing the long game on this issue. When we ask this question
year by year, it has to be front and center.

Suppose you have your long game down. You have diversity, a culture deck like Netflix of 124
slides, clearly defined, built into the hiring process, shared with 10 million viewers.

Are you all set to scale? Not quite. Because your culture is not just an expression of how your
team works together—it’s how they work together at their ​best​. You should tell the truth, but add
a dash of idealism.

HASTINGS​: We try to constantly encourage employees to figure out how to improve the
culture, not how to preserve it. And so everyone is trying to add value by, “Here's a place
we can improve in what we do.” And so that keeps it very alive. It's not the golden
tablets; it's a constantly evolving living document and practice.

HOFFMAN: ​I like Reed’s expression—a living document. And it’s brought to life by a peculiar
tension between reality and aspiration—the culture you want, and the culture you strive for. A
truly strong culture is always under construction.

HOFFMAN​: Do you release new versions of the deck?

HASTINGS​: Yes—so it's been updated a couple of times. We haven't unwound

anything, but we've constantly realized—the current issue is the deck makes us, in some
cases, look cold and competitive, and actually employees experience us as very warm
and collaborative.

But that aspect doesn't really come out in the decks. We're constantly trying to update
the deck to be more reflective of who we actually are.

HOFFMAN: ​So Reed will keep revising that document, and his employees will keep reading it.
And no matter what the size of your company, I’d suggest you do the same. Start early—when
you’re still small and your culture is still being shaped—and recognize that it’s both a creative
exercise and an organic system, one that your employees will shape with you.
Granted, there are people who will tell you, this is a highly overrated exercise. Culture is an
elusive concept. And some people question whether culture—right or wrong, strong or weak—is
just a figment of our imaginations. It’s a question I posed to Reed Hastings.

HOFFMAN​: I had a conversation with a friend of mine—who I can't quote yet, because
he hasn't given me permission. But he basically argued to me that culture was a
retroactive narrative of successful companies.

When you're successful, then you can tell the story of the culture that made you
successful—and the classic one here is, “Culture eats strategy.” But do you think that
that counter point of view is just foolish? Or do you think that that is something that
actually, in fact, there is a little bit of, for really successful high-performing companies,
are then very congratulatory to their culture?

HASTINGS​: Well, very successful companies also work in buildings rather than tents.
But that's a generally accepted practice, that buildings work better than tents. So you do
have to watch out for that retroactive thing, of kind of what's different.

But I would say, on balance, the culture will help Netflix prosper through multiple eras in
a way that, say, my first company Pure Software did not. And so from a personal
experience, we've been able to adapt from DVD-by-mail, taking on Blockbuster,
defeating a company that was 100 times larger than us, to then go from DVD-by-mail, to
streaming of other people's content, to streaming of our own content, from 100% percent
domestic to global.

So we've encountered many challenges, which Pure Software in the 1990s would not
have been able to do. And so I'm very personally convinced that the culture has been
helping on that. But again, I encourage people not to believe in things, that “Culture eats
strategy for lunch.” Both are really important. We spend a lot of time on strategy, and
why not do both well? Why do you have to rank them? Let's try to do culture well, let’s try
to do strategy well.

HOFFMAN: ​Think about that list of changes Netflix has weathered. The same people who
shipped DVDs are now producing original content, snapping up movies at film festivals, and
streaming entertainment worldwide.

Netflix is the Madonna of companies, constantly reinventing itself. And notice how Reed, despite
his strategic brilliance, is convinced that his previous company wouldn’t have made the
transition. It’s as close as you get to a control experiment—same strategic mind, two different
cultures. Only one conquers the world. And maybe culture is just a byproduct of strategy. Maybe
you can ignore it and focus on strategy alone.

But consider that list of threats that Reed faced—do you really want to take that risk? I wouldn’t.
And at the very least, if you’re thoughtful about culture, you can avoid hiring a bunch of white
guys named Reed. Otherwise, your water cooler banter will sound like this.

HASTINGS​: Great pleasure, Reid. Now let’s do the Reed and Reid thing. Oh, right.

HOFFMAN​: So Reed, it's always great talking to you. I always learn something new.

HASTINGS​: You too Reid, a great pleasure.

HOFFMAN: ​I’m Reid Hoffman—not Reed Hastings. Thank you for listening.
Masters of Scale Episode Transcript: Sam Altman

REID HOFFMAN: ​My friend, Sam Altman, is a bit of a geek. And he’s OK with me saying that. I
asked.

SAM ALTMAN:​​ ...to talk about my nerdy qualities, I approve of that.

HOFFMAN​​: I thought you did. Many people have noted you have an affinity for cargo
shorts.

ALTMAN:​​ Honestly, I don’t think they’re that ugly, and I find them incredibly convenient.
You can like put a lot of stuff… I still read paperback books, I like to carry one around
with me. I carry like, computer chargers, cables, they’re just like efficient.

HOFFMAN:​​ It’s somewhat your Batman utility belt.

ALTMAN:​​ Yeah, you just can carry a lot of stuff.

HOFFMAN: ​People don’t often ask Sam directly about his cargo shorts. Or his geekiness, for
that matter. Sam’s the president of Y Combinator, one of Silicon Valley’s most prestigious
startup accelerators. He’s incredibly respected, and founders everywhere know that he can can
make or break their fledgling company.

But if you really want to understand Sam, you’ve gotta understand what species of geekdom he
falls under. Sam is not just your garden variety geek. He’s a student of the history of geeks.

ALTMAN:​​ An aspiring student.

HOFFMAN:​​ Aspiring student, with a fascination for an entire range of tech. So one of the
pieces of tech that you ended up getting was a bronze sword.

ALTMAN:​​ ...I'm not sure exactly which sword you're referring to,

HOFFMAN: ​Turns out, Sam has a whole collection of swords and battle axes. And this
fascination with ancient weaponry has put him in some uncomfortable situations. I asked him
about one.

HOFFMAN:​​ One of the things I learned from the New Yorker profile is that you
occasionally bring a sword in with you to interview an entrepreneur.

ALTMAN:​​ No, that's not true.

HOFFMAN:​​ No?
 ALTMAN:​​ Either they wrote that wrong... No, I think I remember what happened.

HOFFMAN: ​So here’s the story as Sam remembers it: A reporter from the New Yorker had
been shadowing him for weeks to work on a profile. They’re in Sam’s home office, sitting
through meeting after meeting, and Sam is getting bored.

ALTMAN: ​It’s the 16th meeting of the day and I needed some energy.

HOFFMAN: ​Suddenly, a package arrives, and Sam gets really excited.

ALTMAN: ​I had bought this Bronze Age sword.

HOFFMAN: ​Yes, you heard that right. A Bronze Age sword.

ALTMAN: ​It had just arrived, and I had been waiting for this thing, you know, like it had
flown all the way from Europe and it was in this big crate, and I got it out. It's stunning,
perfect. And so I was like so excited.

I mean the first thing you do is like pick up and swing it, and see like how it's weighted,
how it feels. This particular one it had, like you know, the nicks where it hit people's
helmets a couple of thousand years ago. It’s a little dark, but…

HOFFMAN:​​ Or maybe bones, right?

ALTMAN:​​ Too much of a nick for a bone. Too deep of a nick in the metal.

HOFFMAN: ​The nicks in the metal might not have been from bones, but he’s swinging around
this massive weapon from the Bronze Age with a journalist from The New Yorker in the room.
And the day isn’t over yet.

ALTMAN: ​I was on the phone, and it was kind of like a not particularly exciting
conversation. So I picked it up, and I just started, while I was on the speakerphone,
swinging around and fighting this pretend enemy because I was so excited. I just got
this. I had been waiting for it for so long. And I didn't realize ‘till I put it down at the end
that that was probably really dumb, and it was probably going to make it into the profile.
Because a reporter was sitting there watching. You kind of just forget after someone’s
with you for weeks. But I have never swung a sword at someone during an interview
process.

HOFFMAN: ​I’m glad we can finally put that rumor to rest. The Headline “Sam Altman swings
swords at young company founders” can officially be put in the category: Fake News.
He’s not just an Ancient History geek, he’s a geek history geek. He collects tech artifacts —
from historic computers to jet engines – any object that represents a breakthrough in
engineering history. And that’s also essentially what he’s searching for today. A technology
that’s so new, so unlike anything that’s come before, it unleashes a geyser of demand. There
have been consumers, across all eras, who just had to have the next big thing.

And if the history of geekdom has taught Sam anything, it’s that a product that’s deeply loved by
a small group of early users is a product that can scale. I agree. And in fact, I believe it’s more
important to have 100 people who LOVE your product than a million who just sort of like it.

[Theme Music]

HOFFMAN: ​I’m Reid Hoffman, co-founder of LinkedIn, investor at Greylock and your host. And
while I’m obviously a big believer in creating things that can scale, I believe it's more important
to have 100 people who LOVE your product than one million who just sort of like it.

And this isn’t always obvious. Many entrepreneurs fall into the trap of chasing the illusion of
scale - the one million users who show up to use a flash-in-the pan product. What you actually
want to do is seek out the true seed of scale, which has much humbler origins. Many great scale
stories begin with a tiny kernel of die hard fans, no more than 100 strong — who are almost
zealous in their passion for your work. They hang on your every product release. They can’t
believe they ever lived without you.

Think of Sam when that sword arrived.

ALTMAN: ​I was so excited. I just got this. I had been waiting for it for so long.

HOFFMAN: ​It sounds like that.

And when a user like Sam gets excited, that matters — not only because it drives use and
loyalty, but because it will drive him to tell his friends. And if he tells two friends. And they each
tell two friends. And they each tell two friends. Well, that story gets pretty big pretty fast.

I wanted to talk to Sam Altman about this, because he has an uncanny eye for these kernels of
passionate, early users. Y Combinator has become known as a kingmaker in Silicon Valley.
Their alumni include AirBnB, Dropbox, Stripe, Reddit, and more than 40 companies that are
valued at 100 million dollars or more after being incubated at Y Combinator— or YC as we call
it. But Sam doesn’t look for kings. He looks for startups that show these early signs of love from
their users.

And how does he spot them? He pattern-matches with history. Think about his private collection
of engineering milestones. He has an insatiable appetite for these objects, and his collection is
constantly expanding.
 ALTMAN:​​ I like things that were super-important technological milestones in human
history, even if they look like not really technology. So I've got a big collection of
handaxes, which is the longest-serving by far—like a million-and-a-half years—piece of
technology in human history.

HOFFMAN:​​ Is there any particular artifact that you're hunting for?

ALTMAN:​​ I don't know how I'm going to get this one, but I would like an F-1 engine, or at
least I would like the bell of an F-1 engine.

You know, Bezos got one by pulling it out of the ocean, and convincing NASA to loan it
to him. I mean, that's really a lot of work.

HOFFMAN:​​ Is there another one or two? Because this is actually personally fun.

ALTMAN:​​ Alan Kay gave me an Alto.

VOICE: ​Alan Kay created the first computer with a graphical interface, called the Alto. It
inspired the first Macintosh.

ALTMAN:​​ That's not the very last computer that I think is within my capability to
understand everything that's happening in there, but it's getting near the end.

HOFFMAN: ​This collection is like the whetstone Sam uses to sharpen his instincts. When he’s
deciding which founder to admit into a Y-Combinator class, he looks for a ground-breaking idea
that has the potential to give users something they can’t live without. If he doesn’t see it, he
passes.

But to understand how Sam spots the indispensable startups, you have to know how he arrived
at YC himself. He wasn’t predestined to become the startup kingmaker. When he graduated
from college, it could’ve gone either way.

ALTMAN​​: I'm very ashamed to say that I had been planning to go be an intern at
Goldman Sachs that summer.

HOFFMAN: ​“Ashamed” is a pretty strong word. And a distinctly Silicon Valley reaction. After all,
it’s tougher to get a job at Goldman Sachs than it is to get into Harvard. Only about three
percent of applicants get hired. It would make his family proud and his friends envious. He
could live comfortably ever after.

Or he could take a far less comfortable path — one better suited to my cargo-short-wearing,
bronze-age-sword-wielding friend. It began with a little mobile app Sam and his friends
developed while studying at Stanford. It was called Loopt, and it let you share your location with
friends.

ALTMAN:​​ It started as just a project that we worked on sort of like after class and at
night. We had worked on it during a spring quarter and it was really fun.

HOFFMAN: ​“Fun” isn’t exactly a sound business plan. And what makes this idea even shakier,
is that it’s 2005 — two years before the first iPhone was even invented. The word “app store”
had not entered into our vocabulary. So the odds of making money with this mobile app were
incredibly low. And remember, the odds of making money at Goldman Sachs are 100 percent.
The odds were stacked against Sam and his startup, and everyone could see it.

ALTMAN: ​If you said you were working on a startup, people sort of laughed at you in a
not nice way.

HOFFMAN: ​But not everyone was laughing. A new community was just forming. One that was
deadly serious about startups — and fun. It was called Y Combinator, and it immediately called
out to Sam. For starters, its founder was the now legendary computer scientist and entrepreneur
Paul Graham.

ALTMAN: ​We all kind of knew who Paul Graham was. We had followed him online and
he posted this thing saying like hey, not excited about your summer job? Come hack on
your project and you know make a startup and it seemed like it would be more fun than
being an investment banker.

HOFFMAN: ​Fun actually can make business sense. If you love what you’re doing, and other
people do too. And Paul was determined to prove that young innovators with deep passions
could f​ ind success if they were willing to take a gamble.

But this was a controversial idea outside of Y Combinator. Paul Graham was considered a sort
of pied piper for young entrepreneurs — leading them down the road to ruin.

He wrote an essay about this, in 2007, which you can find on Masters of Scale.com.

Traditionally, investors would fund a company in stages — show me growth, and I’ll show you
the money. Step-by-step you had to show user growth, hypothesize how much they’d spend on
your product and lay out in painfully minute detail how much money you’ll need and how much
money you’ll make. It’s classic Business 101 thinking. And it can be exasperating for a founder.

I experienced it myself when I was raising a series A round for LinkedIn. Right around the time
Sam was a college student, I was looking for investors.
At the time, potential Series A investors wanted to see a business model that showed how
LinkedIn would get to profitability. I told potential investors that we weren’t going to generate
revenue until after the next round of funding, and that therefore it shouldn’t matter to them. They
insisted anyway, so the team and I generated a financial model that included revenue sources. I
don’t even remember what we put in it! Rather than wasting weeks on it, we simply set aside a
single evening, drank a couple of glasses of wine, and put together the model. I might have
been a little miffed at even having to waste the single evening, but it was pretty good wine, so it
wasn’t a total waste.

Contrast that with an investor like Paul Graham. He says, “Forget the spreadsheets. Quit
speculating. Just start building on a shoestring budget — and build something a tiny cohort of
users will love. Love is all you need.”

Some of you might be rolling your eyes at this idea that ​love is all you need​. So I want to share
a story that might soften your cynicism. It comes from Dominique Ansel, the famed New York
chef who invented a pastry that became a global sensation. You may have heard of it. It’s
called... The cronut. It’s part donut, and part croissant.

Ever since the cronut became the hottest thing since sliced bread, people have been mistaking
Dominique for a master of publicity. A sort of PT Barnum of the baking world. So our producers
visited Dominique’s Manhattan bakery, and asked how he engineers these publicity coups.
Dominique’s answer: He doesn’t.

DOMINIQUE ANSEL:​​ There was no marketing. There was a team of literally four
employees and myself and when people approach me and ask me what my marketing
strategy was and what was my budget to launch a company like this, I'm "You guys don't
understand. It didn't happen this way." We're a small, small bakery. A tiny bakery. A
neighborhood bakery on a street of Soho and it happened naturally, organically.

HOFFMAN: ​Here’s Dominique’s memory of how the cronut scaled, naturally. Every day, he
bakes a fresh batch of croissants, and studies them like a scientist.

ANSEL:​​ I actually look at it every day. I cut it in half and I look at what we call the
honeycomb which is the structure created by the fermentation of the dough. All this little
air pockets that are inside. The fermentation, you have to smell it. It's a different type of
fermentation. The crust, the volume, the flakiness, everything is so, so important. It's
alive.

HOFFMAN: ​This obsession with the fermentation, the flakiness, the technical details — reminds
me of all the great product designers I know. Dominique was singular in his focus in getting his
croissants right. Then one day, Dominique’s staff challenged him to make a donut instead.
 ANSEL: ​I don’t do donuts. I told them that I have no recipe for donuts since I'm French,
but I most definitely can come up with something new, something special.

HOFFMAN: ​100 taste tests later, the cronut was born. A food blogger, Hugh Merwan, arrives,
snaps a photo, and shared the invention with his fans on GrubStreet. The massive response
stunned even the blogger.

ANSEL: ​He called me the same afternoon letting me know that he had an increase of
traffic of 300% on his website and over 140,000 link and he told me to be ready to be
busy tomorrow.

I had no idea what he was talking about. I was happy for him. I told him "I'm happy for
you. I need to go to sleep."

HOFFMAN: ​Dominique and his staff were facing a situation I’m all too familiar with: It’s the
inevitable fallout on the morning after the overnight success.

ANSEL: ​And the next day we had over 100 people outside. By the third day, we had
over 150 people waiting outside. It was just overwhelming for everyone and it was very
sudden and this doesn't happen, but it happened to us. It was just overwhelming for
everyone. The staff all wanted to quit. It was too much.

HOFFMAN: ​The rest is pastry history. And if Dominique’s staff initially wanted to quit, they soon
learned to cultivate the unexpected outpouring of love. His staff treats the loyal customers lined
up outside like invited guests, serving them hot chocolate before the bakery opened each day.

ANSEL: ​I think it's important for any chef to be in touch with the guest, the customers.
To see them and listen to them. Especially for the holidays to be there for them. To wish
them a happy holidays and thank them for keep on coming to our shop. I think it's
important we have a lot of very loyal customers. A lot of people from the neighborhood
and at the end of the day, a bakery is a local business. It is a neighborhood business
and it's not life without the people in the neighborhood.

HOFFMAN: I​​f you’ve never waited in line to enter a popular New York store — like Supreme, for
example — you may not realize just how radical these small acts of kindness are. And I suspect
it had no small impact on the Cronut’s success.

But if you think Dominique now sits around trying to concoct the next novelty goodie, think
again.

ANSEL:​​ I don't think there's a need or a desire for me to try to recreate something like
the cronut. I don't think I can and I don't think I want. I aim to create pastries that talk to
people and of course I want them to be popular. Of course I want them to be successful.
 Of course I want people to appreciate it, but I'm not trying to be gimmicky or trying do
something that doesn't mean anything to me. I'm still trying to translate my ideas through
pastries. You cannot force it. Even with all the money in the world, you cannot recreate
the cronut. Even if you can hire the biggest team, the smartest people, you cannot
recreate something like the cronut.

HOFFMAN: ​You could apply the same argument to just about any globally successful product.
All the money and all of the marketing savvy in the word cannot sustain its growth in the
long-run. You need more than your customer’s attention. You need their unflagging devotion.
And this poses an almost Zen-like riddle for entrepreneurs: The first step to scale is to renounce
your desire to scale. Focus on those happy few.

This is a concept that every artisanal maker of small-batch goods grasps instinctively. Scale
entrepreneurs? Not so much. But Paul Graham was determined to prove that the same
fundamental truths applied to entrepreneurs with global ambitions.

And to prove his point, he offered a laughably small sum of seed money to those early Y
Combinator entrepreneurs, like Sam: Each one got $6,000, plus free dinners. That’s it. Off you
go. Sam was intrigued.

ALTMAN: ​So we applied to YC and flew out and interviewed and got funded. We’re
actually the first company ever funded by YC and then it just kept going.

HOFFMAN: ​So Sam entered what’s known as the first class of entrepreneurs to get accepted
into Y Combinator. And they were essentially the guinea pigs who were meant to validate Paul
Graham’s theory of scale. And Sam offered quite the validation.

After graduating from YC, his company Loopt struck deals with Sprint, Verizon, Blackberry, and
AT&T. With the advent of the iPhone, they were positioned for growth, and became one of the
first offerings in the iPhone App store. Here’s Sam, sharing the stage with Steve Jobs in 2008:

ALTMAN [Recording]: ​We are incredibly psyched about Loopt on the iPhone. Location,
plus a contact list, and information about cool places means you never have to eat lunch
alone again, or at a bad place. And we think that’s really cool, we really do. You can use
Loopt with your friends on most other carriers...

HOFFMAN: ​In 2012, Loopt was acquired by Green Dot Corporation for more than 43 million
dollars.

ALTMAN: ​We got acquired and I was trying to figure out what I wanted to do next.

HOFFMAN: ​Sam was 26 years old.

 ALTMAN​​: And I decided I was going to partly take a like a sort of mid-career sabbatical
race cars, fly airplanes, travel the world, all that kind of stuff.

HOFFMAN: ​When he wasn’t on the race track or in the air, Sam tried his hand at the venture
capital game. He had an eye for it, investing early in companies with real potential. But it just
wasn’t his idea of fun.

ALTMAN: ​I liked running a company I did not like being on the sidelines and I didn't get
the adrenaline rush I get out of being in the trenches of running a company, which I think
is something that a lot of founders miss when they start investing.

HOFFMAN: ​Sam missed being in the trenches. He felt adrift. And Paul Graham, Sam’s mentor,
could see it.

ALTMAN: ​And I was thinking about things I wanted to do and Paul Graham sort of
jokingly said a number of times over the years that I'm going to retire and you should
take over YC.

HOFFMAN: ​Turns out Paul Graham was only half joking. In 2014, he asked Sam, in all
seriousness, to take over Y Combinator. Sam accepted the offer, and became President of Y
Combinator at the age of 28.

Despite his youth, he was the perfect fit. YC isn’t just an investment firm. It’s an incubator for
founders who want to reshape the future. Think of Y Combinator as an extension of his bronze
age sword collection — only this time he’s collecting the people who can make the swords that
will change the world.

So where does he begin? He begins with a simple mantra. He repeats it to every founder that
comes through YC’s doors: Love is better than like.

I asked him why it bears repeating.

HOFFMAN: ​So love is much better than like. Why this central mantra within YC, and all
of the startups that are coming through?

ALTMAN: ​Well, I think there's a few different reasons for that. One is it objectively
seems to be true. If you look at the companies that have gone to become super
important and valuable, and shaped the world in a big way, they tend to have fairly
fanatical early users. If you think about how you first came across Facebook or Google,
it's very likely because a friend told you how great it was.

HOFFMAN:​​ It is indeed objectively true that these hit products spread by word of mouth. On the
other hand, I can point to a whole graveyard of startups that started out with passionate users.
And then the passion faded. The startup withered away and died of loneliness. It’s
heartbreaking.

So passion is a great early indicator of success, but it leads to a vital question that every
founder must ask a user: How deep is your love?

Sam has a clever way to plumb the depths of their affection. When the first iPhone came to
market, everyone was agog at its new features — a touch screen! Apps! Music on your phone!
But Sam wasn’t just studying the features. He was studying iPhone users. Intently.

ALTMAN:​​ So one of the things that was obvious when people got iPhones even though
you know only a few million of the first iPhones sold, most people who had them used
them every day and loved them and it became like their most precious item.

I remember shortly after the iPhone came out I was in a developing world country it was
really quite poor and people had nothing except they all had a smartphone. And once
they had one like you know you read these statistics and people need to do some
lightweight journalism about, “Would you rather give up your smartphone or X” and it
doesn't really matter what X is, they’re gonna keep the smartphone.

And so I think you could have predicted with a lot of certainty, and many people did, that
this was going to be a large market.

HOFFMAN: ​This is a rather extreme case of attachment to a product. The odds that you’ll
create a product that is so addictive, your fans would give up all their other worldly possessions
for it — are pretty much slim to none. But the extremity of that thought experiment is clarifying.

You want to make your product as indispensable as humanly possible. That’s your primary
objective — before you shore up your business plan, or plan your PR campaign, or any other
steps along the road to world domination. Your first step must be, make yourself indispensable.
But the truth is, you’re unlikely to build a product that makes a user say “I’d give up my left arm
to use this.” So short of that ideal, Sam sets a more modest objective for founders. Focus on
love, not likes. Sam can’t stress this enough.

ALTMAN:​​ And that's really important, because the startups, once they get big enough,
can only grow by word of mouth. All of the growth hacking eventually stops working. If
you're going to keep growing exponentially at some point, it is probably going to be
because people tell you, "You've got to use this product with me," or, "You've got to try
this, it's so great."

HOFFMAN: ​“You’ve gotta try this.” There’s a hidden power to that simple phrase — which Y
Combinator has elevated to an almost mythic status. It’s like “open sesame.” Once invoked, Y
Combinator graduates react as if a wall has opened up before their eyes, and the secret
pathway to scale is laid out at their feet. They know that if they keep hearing the words “You’ve
gotta try this,” it will propel them into the far-off future, the years that their valuation is based on.

ALTMAN:​​ And that seems to be really important, because the startups—so much of the
value is in the far-out years.

And in those years, it depends on continuing to grow at these fantastic rates.

HOFFMAN:​​ By fantastic rates, he means “exponential” rates — the sort of viral growth that can
only occur when that first cohort of users says “You’ve gotta try this” to two friends each, and
they say “You’ve gotta try this” to two friends. And so on and so on. This can scale to millions of
users in a matter of months.

But make no mistake, it’s exceedingly difficult to kick off this chain reaction, unless you’re willing
to hone in on a tiny cohort of users. You should almost have a willful blindness to growth, and a
monomaniacal focus on making just a few people happy.

AUBRIE​​ ​PAGANO​​: You win people over one person at a time.

HOFFMAN: ​That’s Aubrie Pagano, co-founder and CEO of Bow & Drape, a fashion line that lets
customers personalize the design and fit of any piece of clothing. And she had to fight for that
early cult following.

PAGANO:​​ It’s hand to hand combat, and especially when you’re under resourced, even
when you are well resourced actually, it doesn’t matter.

There’s no cutting corners around that. You can’t throw enough money at that problem,
you can’t trick people into loving your brand. You just have to win that over. That’s how
we grew the brand. We grew the brand through word of mouth. We didn’t even start
marketing until last year.

HOFFMAN: ​Mind you, they’ve been in business for five years - and by their third year, Bow &
Drape had grown revenue by over 300 percent from their first.

PAGANO:​​ It was all word of mouth. And I really do think that that is such an important
part to early success.

HOFFMAN:​​ And if your users really can’t stop raving about your product, you can defer
marketing indefinitely. Even if that product is...underwear. No matter what kind you wear, no
matter what gender you are, I’m going to bet that you’ve heard of them. Spanx has been the
name in undergarments since it launched in 2000. Sara Blakely, the founding CEO, has come a
long way since she was shipping packages from her home in Atlanta. One thing she never
updated? Her marketing plan.
 BLAKELY: ​I ran Spanx out of my apartment for two and a half years with a handful of
people before we moved out of my apartment. You know, it's been like that. I mean I had
$5000 and I've been self-funded from the start. So I didn't ever raise a bunch of money, I
didn't even know how to do that or that that was even really an option. And you know
Spanx has never advertised until this year and we're 16 years old. So this has been a
word of mouth brand.

HOFFMAN: ​And Sara didn’t spread the word about Spanx on her own—she recruited an
all-volunteer sales force. She found a way to enlist department store clerks to her cause — by
setting up booths in quiet store corners. Sara’s enthusiasm was infectious—not just to
shoppers, but to anyone within earshot.

BLAKELY: ​So for the next two years I stood in department stores for literally eight hours
a day and in the entrance of Neiman's or where cosmetics were were there were so much
more foot traffic.

I set up a little table and I had my own display table and I brought my own television with
a VCR in it and put the Oprah tape in there and some other news clips that had happened
to me and I was like a one woman show. What I was doing is I was creating this very
loyal sales force that wasn't on my payroll because I would win over all of the associates
at every Neiman Saks Nordstrom that sold the product by being there and explaining it
and giving away free product to them. I would do morning rallies for the store before the
store opened.

HOFFMAN: ​So Sara targeted users who would bring in more users. She honed in on heavy
hitters: people who already had the platform to do her marketing for her. The power of word of
mouth is multiplied exponentially if you can recruit anyone that comes with a
megaphone—whether it’s a salesperson in a department store or Oprah Winfrey. But what
comes next? After you have gathered new users around, how do you know they’ll stick around?

At a certain point, as you’re zipping up a growth curve, you may think those users are here to
stay. Retention is strong. Growth is ticking upward. And the only thing standing between you
and global domination is a slick sales and marketing campaign. You’ll try to hack your way to
growth through targeted ad campaigns and promotional offers. And you’ll have all of the
appearances of growth. But Sam has a warning for you. Scaling falls into two categories — the
easy kind and the hard kind. And you may not know you’re doing the hard kind of scaling until
it’s too late.

ALTMAN​​: The hard kind of blitz scaling is where you try to start scaling up before the
product is really great. And then most of your effort in scaling is to generate demand. So
I think the number one most important insight about how to blitz scale is that the good
 kind of blitz scale is when you are not having to generate demand as you go but that you
first got the product right.

HOFFMAN: ​So the easy kind of scaling is when you first got the product right. When you’ve
created something users LOVE, and instinctively want to share. This kind of scaling happens
organically, as users bring in other users. The hard kind of scaling is when you only get the
product half-right. When you’ve created something users KIND of like, and which they’ll use. But
not something so good that they stick with it, and certainly not so good that they’d think to share
it.

ALTMAN:​​ And that's something we see, again and again. People don't stick with
products that they don't love. And so it is easy to get a lot of people to try something with
a clever growth hack.

The value of those users is often very low. They use it for a little while, you engage them
with some trick, and they don't stick around. And that is not how you build these
enduring, valuable companies. You need things that people want to come back to and
use a lot, and I think it's much easier to figure that out early, when you can still make a
lot of changes to the product. Everyone's like, "Well, I'm just going to get a lot of people
to like me, and then I'll figure out how to make them love it later."

In practice, that's really rare. I would challenge you to think of an example.

HOFFMAN: ​Challenge accepted. I actually founded one of these companies: LinkedIn. One
rather striking exception to Sam’s rule.

We had a passionate set of early users, but these were not the users that helped us get to
scale. We were grateful, we appreciated their support, but what they ultimately wanted from us
wasn’t something that we could deliver. I explained this to Sam in our interview.

HOFFMAN:​​ And so LinkedIn, for example, is one, because of our early users who loved
us, called "open networkers," they put it in their headline—called "LIONS"—"LinkedIn
Open Networkers." They loved us because they wanted us to be something different
than what we were. They wanted the whole world to say, "Everyone should be able to
connect to Bill Gates, and have him connect back."

And it's unrealistic about Bill's time and commitments, and things he needs to be doing.
And so we are not an open network. And it took us to get to scale, when other people
started loving us, the kind of people that we were targeting.

Because the thing that I completely agree with is, well, if you don't have millions of
people loving you, you don't have a fundamental company. But the question is, the initial
 people we had loving us at LinkedIn were not the people that we wanted to love us when
we were hundreds of millions.

ALTMAN: ​We've seen a version of this pattern a bunch of times, which is, if you have a
network-effect consumer business, you have this cold start problem.

HOFFMAN: ​Exactly. If scaling your product is ultimately dependent on having a large group of
users, then you have a chicken and egg dilemma. The truly magical features we envisioned,
simply couldn’t come to fruition until we had a dense network of users. We wanted to create
such a vast reservoir of talent that a recruiter could say, “I’m looking for an accountant based in
Biloxi, Mississippi who has a humanities degree plus 10 years of work experience and the
capabilities to lead team-building events.” And I wouldn’t be surprised if you could find that
dream candidate in just one click.

But it took years of clever hacks and grunt work to enable that sort of high-definition
headhunting. And those valuable users just weren’t going to LOVE us straight out of the gate.
So how do you get there? You work in batches, adding one narrow group of users at a time.
Sam explains.

ALTMAN:​​ You've got to find someone or some set of people that are going to use you a
lot in the early days. And that may be a small, narrow-but-deep wedge, and then you
expand it later.

And this is fine. We see this all the time with companies, where they start with some
group of users that is not a particularly lucrative market—maybe not be the long-term
users they want, but people, for whatever reason, can use the product a lot and get a lot
of value out of it, and you use that as a bootstrap to create value for everybody else.

HOFFMAN:​​ Another example is Facebook. When Facebook first launched, it was only for the
students of a few colleges. It slowly expanded from Harvard to Columbia to Stanford, and
beyond. But the ultimate way to scale was to go far beyond college students. Sam explains.

ALTMAN: ​In fact, Facebook—it turns out that their most profitable market is not students
at the 10 most elite colleges. But those are people with a lot of time on their hands, they
really cared about their social lives, they all had Internet access at a time when not
everybody at that age did. And so it turned out to be a really good primer.

HOFFMAN: ​That’s right. Sometimes you can’t get to the millions of people who love you until
you’re actually at a critical mass. Just like Facebook, LinkedIn had to find its initial users from
somewhere.

The next generation of truly lovable ideas will look nothing like the previous generation. If you
take a backward glance at Y Combinator’s most stellar graduates — Airbnb, Dropbox, Stripe
— you’ll think they’ve mastered the app economy. And the assumption is that Y Combinator
should stick to what they know.

Sam begs to differ.

ALTMAN:​​ YC was mostly funding software companies but I had a lot of conviction that
we could apply the same thing that made YC work so well for software companies to
companies in a lot of the areas that I cared about: AI, synthetic biology, energy.

HOFFMAN: ​This may sound like a radical leap outside of Sam’s area of expertise. After all, you
can’t build a supersonic jet on a shoestring budget. You can’t ask a user to hop into an
experimental self-driving car and hope they come back in one piece to give you their feedback.

And when you think about the differences between apps and what is often called “hard tech”,
you might be tempted to ask Sam, “What on earth are you doing?” In fact, Sam hears this a lot.

ALTMAN: ​But at the time it was like this is a really dumb thing. One of the things that is
funny as a side note and just as a note to anyone that tries to do anything. Where you
take a company in a different direction or scale it is that it is always funny to sort of like
read the articles from the same journalists that when you say you're going to do this
thing say like, Sam is crazy, completely unqualified and not going to work, YC is going to
die, going after hard tech companies is so stupid.

HOFFMAN: ​But to Sam, this leap into the unknown is completely consistent with Y
Combinator’s mantra: Focus on love, not like.

To him, if a company is inventing something unheard of, you can ensure users will love it right
from the proof of concept. Who wouldn’t love the invention of a supersonic jet? Or a self-driving
car to battle through rush hour, while you flip through a magazine? Or a cold fusion energy
plants that simultaneously make energy cheap and solve climate change?

ALTMAN:​​ One company that you and I were talking about recently is this company
called Boom; they're making a supersonic airplane. And they really have lit up people's
imagination, and people really want it. People really love the idea of going to Japan in a
few hours instead of 10 hours from San Francisco.

HOFFMAN:​​ Boom Technology, the supersonic jet company, graduated from Y Combinator in
2016. One year later they raised $51 million in venture capital.

Here’s the magic of tackling the seemingly insoluble engineering problems. People fall in love
with your idea alone. Take, for instance, Boom.
 ALTMAN: ​It is harder for sure to make a Mach 2.2 airplane than a Mach 0.95 airplane,
but it is easier in the sense that people care. People want to be part of it, people are
excited. People pay attention. The CEOs of large airlines decide to come visit you. And
that's what we see, again and again.

HOFFMAN: ​That so-called “hard tech?” Sam says it’s easy.

ALTMAN: ​This is why I tell people that, in many ways, it is easier to start a hard
company than an easy company.

HOFFMAN: ​So ironically, it may be harder to start an easy company. And easier to start a hard
company. They’re just so lovable.

And now Sam notes with wry amusement that in a span of 14 months, press coverage flipped
from scornful to glowing.

ALTMAN:​​ Like, “Sam is a genius, it is like predestined, he was going to take over YC.”

I think you have to ignore all that and just say like I have a high level conviction and
we're going to try this thing. And most people will tell you it's not going to work. If it's
something new. Most people are afraid of things that are new and you just do it. It's
probably not that risky. Probably won't kill the company and probably undervalue if
everyone else says its stupid. So we were able to do that. And the first thing was expand
YC into all these different directions. I think the greatest companies are created on kind
of the bleeding edge of what people are working on.

HOFFMAN: ​And when you think about it, this brings Sam one step closer to expanding his
collection of engineering milestones.

It’s only at the bleeding edge of innovation that you can discover a product that makes you say:

ALTMAN: ​It's stunning, perfect. And so I was like so excited. I had just got this, I’d been
waiting for it for so long.

HOFFMAN: ​I’m Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Sara Blakely

ANDR​​É​S RUZO​​: My grandfather in Lima told me this legend of the Spanish conquest of
Peru. The few Spaniards that returned from the jungle come back with these horrible
stories. They talk about giant snakes that can swallow men whole, spiders as big as your
hands that eat birds, fierce warriors with poison arrows that can kill you in a nick. One of
the details in this legend was a river that boiled. That's really where our entire story
starts, a detail in a childhood legend.

REID HOFFMAN: ​That’s Andrés Ruzo. He’s a National Geographic explorer and geothermal
scientist. He studies natural sources of energy. And in 2010, he began a search for an energy
source like none that had ever been documented.

RUZO​​: Every company that I'd work with, every geologist I could get my hands on, I'd
ask, “Hey, have you heard of a boiling river, a large, big, thermal river in the middle of
the Amazon? I heard about it in a legend.” Some people just laughed it off and said, “Ah,
whatever.”

The very last time I asked that question was actually kind of funny. I was at a mining
company. I had just given this presentation, and it went really, really well. There was a
much older geologist, very put together, who was sitting back there, and I was talking to
him about it.

Things had gone so well that I loosened up a bit … I was like, “Hey, one random
question…” I asked him about The Boiling River, and I asked him if he had heard about
it. His response was, “Andrés, your geothermal work is very interesting, very innovative,
but don't ask stupid questions.” I walked out of that meeting with my tail between my
legs.

HOFFMAN: ​Most people thought he was asking a stupid question. But Andrés had grown up
between Peru and Nicaragua. He was fascinated by the Amazon. And he believed, as a
scientist, that the Boiling River could exist. LIke any explorer, he found help in some unlikely
places.

RUZO: ​I've been asking around for two years, case closed, no boiling river in the
Amazon. I go to a family dinner, and my aunt asked me about my research. I told her
about The Boiling River and the legend and how it doesn't exist and how it can't exist.

Well, she looks at me very seriously, and she says, "But, no, Andrés, it's real. I've been
there.”
 And then my very straight-laced psychoanalyst uncle chimes in, says, “No, Andrés, she's
not kidding. It's protected by a powerful shaman. It's at least as wide as a two-lane road.
And it's so hot you can not only not touch the water, but you can't even put your hand on
top of it because the vapor will burn you.”

My aunt used to do indigenous rights work and had worked in the central Peruvian
Amazon and made friends with the wife of this very powerful shaman who protected this
sacred, thermal river. She ended up leading me into the jungle and then that's where I
met Maestro Juan Flores, the shaman of The Boiling River, someone who's truly
changed my life.

HOFFMAN: ​Andrés found allies in the local shamans, who saw his respect for the sacred site,
and for traditional spiritual practices that had protected it. The shamans offered him guidance.
Still, the road ahead wasn’t easy. And it wasn’t exactly a road.

RUZO: ​From Lima, it was a one-hour plane ride, followed by two hours by four-by-four
on dirt roads, then another hour on a motorized canoe, and then another hour hiking into
the jungle.

HOFFMAN:​​ Andrés is quick to tell you that he wasn’t trying to “discover” the boiling river, which
was already known to local cultures. Rather, he was trying to document it for modern science.
There were several false starts.

But then: the fateful moment.

RUZO: ​I walked out of the jungle and when you think of jungle, you have to think of
shade. It's dark in the jungle. You see these 60-foot walls of green, which are the trees
shooting straight out of the jungle. Then, among the treetops, you see a cloud of smoke
just going up towards the heavens.

You start following that cloud down towards the earth, and you see it's coming from this
river. It's hot. It was like a veil of steam just covering the clear, turquoise-colored water,
and there were these beautiful just ivory-colored stones on either side, the bedrock.

I get there, and I was just dumbfounded.

I ran down to the edge of the river. There were these kind of rock steps hewn into the
side of this little cliff, and I climbed down. I remember almost being hugged by the
vapors. You take your first breath in, and there's not too many places in the world where
you're conscious of your lungs.

That dense, thick, hot air goes into your nose, goes into your body, fills up your lungs,
and then you exhale. It was awe-inspiring, in the most honest sense of that word.
HOFFMAN: ​Andrés first observed the river in 2011. It would take him another three years to
prove that it was a naturally-occurring phenomenon. And that was still only the start.

You can read Andrés’ full story in his TED Book, ​The Boiling River.​ It’s a delightful short read,
full of adventure and science.

Like any great explorer, Andrés knew what it would take to succeed in this search. He had a
guiding idea of what he was looking for and he constantly surveyed the environment for clues.
He recruited useful people to help him each step of the way. He had the resilience to overcome
the inevitable obstacles and setbacks, and he just kept searching. It’s the classic hero’s journey.

And like Andrés, successful entrepreneurs are always on the search for their big ideas. They
aim for it, they track it, they keep their eyes open for clues. They surround themselves with a
team who can help, and they rebound from dead ends and false discoveries.

I believe there’s only one way to find your big idea: Look for it. Look for it. Look for it. And then
act.

[THEME MUSIC]

HOFFMAN: I​​’m Reid Hoffman. Founder of LinkedIn, investor at Greylock, and your host. And I
believe there’s only one way to find your big idea: look for it, look for it, look for it. And then act.

I often play the role of mentor to aspiring entrepreneurs, and the question I’m asked often is:
How do I find my big idea? And how do I know it when I see it?

I always compare launching a startup to jumping off a cliff and assembling the plane on the way
down. So this week, we’ll look at the earliest step of scaling a company: finding the idea you’ll
jump off the cliff with. You have to have an idea of the kind of plane you’re building and then you
have to jump.

There’s a myth amongst entrepreneurs of the “lightning strike” — or the “aha” moment when an
idea just comes to you. In reality, it’s rare to find a successful scale entrepreneur who simply
received an idea. It’s more likely they were already on the hunt. If you want to find your big
business idea, you have to constantly search for it. Surround yourself with the human equivalent
of a pack of bloodhounds. And when you find yourself on its trail, follow the scent relentlessly.
And be ready to act when you think you’ve found it.

What differentiates successful entrepreneurs from everyone else with a good idea? They pursue
it.
I wanted to talk to Sara Blakely about this because her story of spotting, pursuing, and realizing
her big idea is both legendary and highly unlikely. She came up with the idea for Spanx at age
26 by cutting the feet off a pair of pantyhose. With no background in fashion, fabrication, or
business, she grew it to a billion-dollar company that reinvented underwear — without ever
taking outside investment.

I believe the key to her success happened before the idea popped into her mind. She
succeeded because of her clarity of purpose; her consistent optimization of her own best
thinking; and her willingness to act, and her persistence to follow through. Her story is the
perfect parable for any entrepreneur looking for their first — or their next — big idea.

She’s also really fun to talk to. For a tech guy like me, I don’t get to have many conversations
like this.

HOFFMAN​​: One of the things that I love talking about to you is my world is this whole
digital world and the people who actually build things. That’s super cool.

SARA BLAKELY​​: I know my world is all about butts, Reid.

HOFFMAN:​​ Hey, it's, it's you know, it's different.

HOFFMAN​​: Whether you’re making undergarments or iPhone apps, great entrepreneurs are
always on the hunt for the idea that changes everything. Sara is no exception. For her entire
adult life, she’s spent her waking hours hunting for that big idea.

BLAKELY​​: Well when I was in my 20s, in college, I had a visualization that I created for
myself that would mean that I had arrived. And my visualization was me sitting on the
Oprah Winfrey Show because in my mind if I was sitting on her show it means I had
done something really right and done something amazing with my life. And I had no idea
how I was going to get there.

HOFFMAN: ​Sara was constantly looking for the clues, trying to figure out what moves to make
so she could do something so amazing, that even Oprah had to notice.

BLAKELY: ​And then I called the next 10 years of my life filling in the blanks. I was
always thinking, “Is this what's going to get me on the Oprah show?” You know I take the
LSAT and go to law school because I thought maybe I'd try a famous case and that's
how I end up on Oprah. But then I failed the LSAT twice and couldn't get into law school.
And then I did stand up comedy for a while and I thought maybe something here is how I
end up on Oprah so I was consciously and subconsciously pursuing things that I thought
could ultimately get me to that that snapshot that meant success for me.

HOFFMAN: ​At age 26, she found herself pretty far from the destination she had aimed for.
 BLAKELY: ​I was selling fax machines door to door for a living.

HOFFMAN: ​Door-to-door fax machine sales. Not exactly disruptive tech. It was a dead end
career, and Sara knew it. She had to get out.

BLAKELY:​​ I literally had a moment Reid, where I pulled off the side of the road and was
like I'm in the wrong movie. This is not my life. Call the director or the producer or I'm not
supposed to be being escorted out of buildings and business card ripped up in my face
all day cold calling.

HOFFMAN: ​On the side of the road that night, Sara’s despair led to a clarity of purpose. And
that clarity became the catalyst that sparked the big idea.

BLAKELY​​: And so I went home that night and I wrote down in my journal “I want to
invent a product that I can sell to millions of people that will make them feel good.” This
was something that I set intention for, I had really asked the universe to give me an idea
that I could bring to the world.

HOFFMAN: ​Different people have different ways of expressing how ideas came to them. Sara
will tell you that she asked the universe, and the universe answered. I would interpret it a bit
differently. I’d say Sara kept asking the same set of interesting questions, starting with “Is this
my big idea?” And one day, inevitably, the answer was going to be “Yes.”

It came to her as she was getting ready to go to a party, and found herself aggravated by her
wardrobe options.

BLAKELY: ​I wanted to wear my cream pants to a party and I was a frustrated consumer
that had no undergarment to wear under them that wouldn't show. So I cut the feet out of
my own control top pantyhose so I could throw them on under my pants and wear any
kind of great strappy heel. And it worked beautifully except for they rolled up my leg all
night at the party and I came home that night I was like “This should exist for women.”

HOFFMAN: ​Sara just uttered three words that flicker like a neon flashing light over a truly big
idea. Those three words: “This should exist.” They’re your clue that you’ve stumbled onto
something with real potential. If you feel, as a consumer, that you need it. If you can imagine a
crowd of others nodding with emphatic encouragement, this just might be your idea.

And Sara had spent years scanning the horizon for that neon sign pointing to her big idea.
When she saw it, she followed the sign. And you may ask yourself: How many other women had
mutilated their pantyhose in exactly the same way? The answer, apparently, is: plenty.
 BLAKELY: ​I meet women all the time that have been cutting the feet out of their
pantyhose for years trying to solve undergarment issues for themselves. And they're
always like why didn't I do Spanx. And I really just think it's because I had been looking
for this and was prepared in my mind to go for whatever idea presented itself.

HOFFMAN: ​Sara was prepared to go for whatever idea presented itself. So when the idea
struck, she was ready. All the other women who had the same thought simply went to their party
and back to work the next morning, leaving the neon sign “This should exist” behind them in the
night.

And this gets to the heart of a major misconception around entrepreneurship. There is a myth
that big ideas drop out of the sky, land in your lap, and transform you into a billionaire the next
day. Ta-da! This almost never happens.

Yes, Sara did have a key moment of inspiration, in her bedroom getting ready for a party, and
that matters. But you have to look at what happened before that moment. Sara had already
oriented herself squarely in the direction of a big idea; she’d been on the hunt for the last 10
years.

Whatever kind of idea you’re staking out, you have to be intentional about looking for it. Think
about our explorer ​Andrés​ Ruzo. He knew his “find” was in the Amazon, and he could make
some informed ideas about his launch point.

As an entrepreneur, you have to put yourself in situations where YOUR great ideas are likely to
strike. Sara has made a science of staking out her own great ideas.

BLAKELY: ​I've identified where my best thinking happens and it's in the car and I live
really close to Spanx so I've created what my friends call my “fake commute” and I get
up an hour early before I'm supposed to go to Spanx and I drive around aimlessly in
Atlanta with my commute so that I can have my my thoughts come to me. And I thought
of the name Spanx in the car.

HOFFMAN: ​Sara knows that she does her best thinking in the car. So she intentionally creates
the time and space — first thing every day — to open herself up to new ideas. This may seem
like an interesting bit of trivia. But it’s more important than it seems.

When I interview guests for this show, one question I ask every single person is “What is your
favorite place to think big?” Here’s what some of them have said.

HOFFMAN​​: Your favorite place to think big.

BRIAN CHESKY​​: Oh my god. The Walt Disney family museum.

 MARIAM NAFICY​​: Running by the Golden Gate Bridge.

MARK ZUCKERBERG​​: My lawn, pacing around in circles.

NANCY LUBLIN​​: Anywhere with you, I mean, when I’m rubbing elbows with other
people who are not in my space listening to them talk about what they do, makes me
better.

REED HASTINGS​​: My living room at home in Santa Cruz.

PETER THIEL​​: Somewhere beautiful nature.

CATERINA FAKE​​: I keep very strange hours, I have this span of time between 2:00 AM
and 5:00 AM, usually, in which I do a lot of thinking and a lot of work.

HOFFMAN​​: Ah. So, it’s kind of a when, not a where.

FAKE​​: It’s a when, not a where.

EVAN WILLIAMS​​: Walking anywhere.

SHERYL SANDBERG​​: The treadmill.

SAM ALTMAN​​: I think getting a feeling of a good office down is really important for good
thought. I saw what I thought was the perfect office which was a Japanese teahouse
basically with beautiful custom wood by itself in a forest.

PAYAL KADAKIA​​: A dance studio.

BILL GATES:​​ Taking walks and driving, are for me, a good time to think about things.

MARK PINCUS​​: My surfboard and then my bike.

JOHN ELKANN​​: In the nature, because on one side, it really grounds you to see how
incredibly extraordinary nature is. On the other, it really stimulates you to think big, to
dream and be ambitious.

HOFFMAN:​​ Sara and I had already discussed her “fake commute.” So by the time we got to the
“lightning round”, the answer was pretty obvious….

HOFFMAN​​: And this is the one that you get a laugh, your favorite place to think big.

BLAKELY​​: My car. Ding, ding, ding.

HOFFMAN: ​I haven’t had the chance to answer my own lightning round questions -- yet. But if I
did, I’d be torn between two answers. The first is that I do my best thinking with other people.
Usually with just one person at a time. I have a thick skin, and I don’t mind being challenged. In
fact, I usually ask people to tell me all the reasons why my idea will fail. This lets me take a
spark of an idea and shape it into something that can win. This gives me an edge when it comes
to spotting landmines and roadblocks, even before I act on my idea.

But my second answer is about location. Some people think big in familiar places, like the
shower, or their favorite running path. And it makes sense - familiar spots let you go on
autopilot, while your mind wanders. But my favorite thinking spots are ones that are brand
new…

HOFFMAN: ​I do my best thinking essentially in Cafe's or new spaces. Places that I

haven't been in a lot, usually requires a little bit of bustle, it doesn't have to have people
or not, but it has to have a thing where I can really focus on just a purely blank page,
new part of thinking.

There’s a number of events where the content on stage is super boring, but I'm locked in
my chair because I can't walk out. That's the reason I always bring a notepad with me,
because what I'll do is I'll start working. I have the focus of the fact that I can't leave, I
can't get distracted, I can't go work on something and I can't do email, and I'm just sitting
there with my pad of paper.

I'm sitting there going, "Okay, this is really fucking boring," and I pull out my notepad and
I start working.

HOFFMAN: ​Sara has some great practical advice for anyone looking for their next big idea.

BLAKELY: ​I get my ideas all over the place. I mean in a magazine I'll see an image or
see a color in nature. I'll see someone wearing something that just sparks something, I’ll
overhear a conversation.

Anybody could do this exercise: Go home and look at 15 things in your life and write
them down on a piece of paper and then write down how and why they could be better.
You'll have probably a big idea right there on that sheet.

HOFFMAN: ​Let’s say you’ve found your perfect thinking place. And you stumble on that big
idea. The one that starts the “This should exist” sign flashing in your mind.

That’s great. And I’m happy for you. But that’s just the first step of the entrepreneurial journey.

HOFFMAN: ​Some people have a bunch of ideas for products but that doesn’t mean they
 have an idea. It’s like, “Oh, I had an idea for a smartphone, because I thought what if
you had a computer in your pocket?” And “well, thinking about having a computer in your
pocket is not the same thing as having the idea for the smartphone.” So it’s actually, can
we build it and can we make a business out of it?

HOFFMAN: ​So an idea isn’t complete until you figure out how to build the business. And we’re
about to see how Sara does it. But it’s useful to spend another moment looking at how some of
the best business minds find that initial idea.

HOFFMAN​​: This happens a bunch in Silicon Valley, we tend to go “Oh, there’s a

platform shift, which businesses does that open up?” Now we have mobile phones, what
businesses are now possible? Now we have cloud storage, what businesses are now
possible? Now we have artificial intelligence, now what businesses are possible?

HOFFMAN: ​Another way that entrepreneurs find their ideas is by noticing a more abstract
pattern or trend, and building toward it.

HOFFMAN​​: “I can see this model for how the components can come together, and even
though there's no initial demand for those things, I figure I can build to that.” LinkedIn is
one of those, Airbnb is one of those. There was a little bit of demand for Airbnb but not a
lot of demand. It was “I want something really cheap, I want to stay on someone's couch,
like there's this thing called couch-surfing.” But the “I want to rent someone else's room
in their apartment or their apartment for a night.” That's a new thing.

HOFFMAN: ​No matter how quickly you translate those patterns into ideas, chances are… other
people will be doing the same thing. The difference between you and them is your willingness to
actually ​do​ something.

You can’t scale an idea that only lives in your head. You have to act on it—because that’s the
only way to find out if it has legs.

And great entrepreneurs know: Not every idea is going to succeed. But every idea should be
treated like it could. You can only know in retrospect which ideas go the distance. But even if
your first idea doesn’t take flight, it may land you at the doorstep of your next big idea.

Sara’s big idea came to her after she improvised her undergarments.

BLAKELY: ​I came home that night and was like, “This should exist for women.”

HOFFMAN: ​This is a pivotal moment in Sara’s trajectory. She calls it the moment that Spanx
was born. But here’s the thing: It wasn’t born just because Sara came up with an idea. It was
born because she decided to do something about it.
Sara could have just kept cutting the feet off pantyhose every time she had a party to attend.
She could’ve just tolerated her makeshift contraption rolling up her legs all night. Instead, she
saw an opportunity—and seized it. It started with a little reconnaissance.

BLAKELY:​​ I went to Neimans and Saks and asked: “you know what do women wear
under these white pants?” and the sales ladies would always say, “well we don't really
know!” or they'd point me in the direction of the shapewear that did exist and it was really
thick and dreadful and too much control or not what I was looking for. And then there
was like regular underwear which left a panty line that was visible so there was this big
gap.

HOFFMAN: ​At this point in the episode, I want to acknowledge that women’s shapewear is not
exactly one of my personal areas of expertise. But every great investor spends time
understanding underserved markets that are not their own. So for those of you in the audience
who are NOT in the Spanx target market, here’s what you need to understand.

Spanx may have started as normal pantyhose with the feet cut off, but that isn’t where it ended.
The classic Spanx, which women by the millions now rely on, are the length and shape of
bicycle shorts. They look great under pants and dresses, never creating seams or lines.

You could compare them to old-fashioned corsets, except that Spanx are breathable, flexible,
and invisible under clothes.​ They’re architectural marvels.​ The waist lines have an incredible
non-sticky grip that keeps them in place. The legs don’t roll up or show through clothes. On top
of all that, they have a funky, provocative name that says, “This ain’t your grandma’s girdle.”

But none of this existed yet when Sara first had the idea. She saw a gap in the market, and
started building toward it.

BLAKELY: ​So I was doing two things. I was trying to determine if there was a market
place beyond just my own thought and what I wanted. And at the same time I was
iterating the product.

HOFFMAN: ​Mind you, Sara had no background in fashion design or clothes fabrication. But that
didn’t stop her.

BLAKELY: ​I tried to make the prototypes myself. I went to fabric stores and bought
elastic and tried to like paper clip it to the end and then I tried to sew it. It was through
the iteration of the prototype that I really started to love it and love what it could do for my
wardrobe.

HOFFMAN:​​ Sara loved her handmade versions. But she quickly saw their limitations. She
wanted to take it one step further, by partnering with a manufacturing plant that could produce at
capacity.
And this is a critical step for anyone developing an idea. You have to surround yourself with
people who can help. Remember the river guides and shamans that our Amazon explorer called
on. You have to surround yourself with this kind of network.

Sara didn’t know anyone in manufacturing. But when she reached out to find them, they
instantly understood her vision, right? Not exactly.

BLAKELY: ​No one took my call.

HOFFMAN: ​Sara couldn’t get anyone to see the genius behind her simple idea. Footless
pantyhose? What’s the point?

As an aside, I have a sneaking suspicion that Sara was speaking to mostly male manufacturers.
If she’d been pitching other women, she may have found a willing partner more quickly —
because they would’ve understood the problem she was trying to solve. Great ideas get passed
over. Because the people in charge just don’t understand the issue. But I digress.

BLAKELY: ​I cold called all the manufacturing plants. Every single person thought this
was the craziest idea.

They didn't get it but I ended up getting one manufacturer in North Carolina that called
me after I did my cold calling round begging all of these people to try to make my product
he said, “Sara I've decided to help make your crazy idea.”

He said the only reason why gave me the chance was my enthusiasm for the idea, he
still didn't think it was a good idea.

HOFFMAN: ​If you’re a regular listener of the show, you may remember our episode with
Stewart Butterfield, the founder and CEO of Slack. Remember what he said about getting
people on board with your idea? Your ability to show your passion - to tell the story of how
you’ve poured your blood, sweat, and tears into your product - is just as important as the
product itself.

And when you have a great story, you’ll bring people along. Andrés, our Amazon explorer has
another great example of how you get help. In short: You ask for it.

RUZO​​: At the very beginning, you're begging people to come. Heck, it's true. You're
begging people to come. You're asking anyone willing to help. My wife was the first
person that helped me.

I had a friend from high school, cousins in Peru, cousins in Nicaragua that came down,
actually, and helped out as well, just friends, people who were willing to donate time at
 the very beginning. It was really homegrown. I couldn't pay anybody, but people wanted
that experience.

You might not have the best and the brightest. You might not be the best funded but as
long as you've got a desire to move forward, I think that's where the change really
happens. That's it, that's it.

HOFFMAN: ​As Andrés and Sara’s stories both show, you don’t need to start with an impressive
or high-powered network. All you need is passion, persuasion, and grit.

And Sara’s story is one of real grit. Remember, she didn’t have any experience with business,
or retail, or fashion.

BLAKELY​​: I was just like, “OK this might be my way out of selling fax machines and
being able to sell something that I actually really want to sell and love that I can provide
people.”

HOFFMAN​​: That makes total sense I mean one of my theories about how scale
businesses work, you build a product that people love and then you scale it. And so it
totally makes sense that you said, “Look I cared about scale already coming into it.”
Right. “That was the that was the thing and I cared about like. ‘this be the ticket to
transforming my life and millions of people's lives?’”

HOFFMAN: ​She was teaching herself how to realize every piece of this idea. And that included
something I don’t think we’ve mentioned yet in 21 episodes of this show — patents.

Most entrepreneurs don’t think to pursue patents right away. In my world of tech, they aren’t the
most important part of developing a business. But in other industries, they matter. A lot.

So I reached out to someone who knows patents inside and out to get a bit of advice for any
would-be entrepreneur or inventor who’s just getting started. Michelle Lee is the former Under
Secretary of Commerce for Intellectual Property and the former Director of the U.S. Patent and
Trademark office. Try saying that five times fast. Basically, she was like the Chief of Ideas for
the entire country. And even in an increasingly digital world, she says patents are never going to
go out of style.

MICHELLE LEE​​: People would ask me, "Do I ever think that all the great ideas have
been invented and at some point the patents office might run out of ideas to patent?”
And I say, "Absolutely not."

In this day and age, our most valuable companies assets are its intangible assets. Its
algorithms, its brands, its procedures, its processes.
 If you've invested your time, energy, effort, and resources creating that something new
and valuable, you really don't want someone to be able to copy it, taking advantage of
your work.

HOFFMAN: ​And if you’re an independent entrepreneur like Sara Blakely was, Michelle has a
message for you.

LEE​​: Really, the intellectual property system and our patent system is designed to be
available to everyone, whether you're not so well funded or extremely well funded.

We hope that the small players grow up to be big companies and that is how the system
was designed.

HOFFMAN: ​I think Michelle would be proud of Sara’s patent story.

BLAKELY​​: I started you know immediately went and researched patent's at the Georgia
Tech library and I wrote my own patent. I got a book on patents and trademarks at
Barnes & Noble on Peach Tree.

HOFFMAN:​​ I have a feeling a lot of patents have been researched at that Barnes & Noble on
Peach Tree Street in Atlanta. Or the one in Union Square in Manhattan, or the one on Almaden
Plaza in San Jose. When you find your idea, you should protect it. And if you only talk about
your idea to one person, you might want to make that person a patent lawyer.

And that brings me to a fascinating footnote in Sara’s story. As she leaned into the idea of
Spanx — naming them, fabricating them, patenting them — there was just one thing she did not
do.
BLAKELY:​​ ​I didn't tell anybody my idea for one year.

HOFFMAN: ​This was a surprise answer to me. I tend to think that the best ideas are produced
by networks, not individuals and that feedback is a huge part of scaling an idea successfully.
But if you listen closely, you’ll hear who Sara means when she says she didn’t tell “anybody.”

BLAKELY: ​I didn't want to tell friends and family because I didn't want to invite ego into
the process too soon and so I kept it a secret from everybody in my life and didn't seek
validation.

But I did share it with like manufacturers or patent lawyers or people who could help me
move it along. And by doing that I didn't spend my first year explaining it and defending
it. I just spent it pursuing it.
HOFFMAN: ​It’s not that Sara didn’t have any input. She just figured out where to get the most
useful input, from people who knew the ins and outs of the business. And she shielded herself
from the kind of criticism that might have crippled her.

BLAKELY: ​An idea is its most vulnerable in its infancy and that's also the moment in
human nature we want to immediately turn to our right or left until our coworker or friend
or boyfriend or boss you know, “I have this idea.” And out of love and concern we hear a
lot of things that stops us right in our tracks.

“Well sweetie if it's such a good idea why doesn't it already exist?” And “Well you know
even if this idea does take off Sara, you’re going to spend your savings and the big guys
will knock you out of the water in six months.”

HOFFMAN: ​This kind of unhelpful input is very common, and we’ve heard it on this show
before. Remember our episode with Linda Rottenberg, the CEO of Endeavor? Linda has now
built entrepreneurial communities all over the world. But twenty years ago, she was a recent
graduate with a dream... a dream that was about to be crushed.

LINDA ROTTENBERG: ​My parents freaked out. And in fact, my parents overheard us
plotting this global organization that was going to support high-growth entrepreneurs in
emerging markets. And my mother looked at my father like, “You’ve got to stop this.” And
my dad gently came over and reminded me that I needed to be financially independent, I
didn’t have anything to fall back on and this didn’t sound like job security.

HOFFMAN:​​ If you listened to that episode, you know that Linda’s idea ended up providing much
more than just job security. And that’s because she held tight to it, even when people tried to
talk her down.

It isn’t only entrepreneurs that face this kind of nay-saying. It’s anyone with an idea that’s out of
the ordinary. Once again, our geoscientist Andrés Ruzo, has a similar experience. When he
talked about his quest to find the Boiling River, he didn’t get a lot of love.

RUZO: ​I spent about two years asking people. In general, I think I could break those
down into three groups. Number one, the group who was like, “Hey, that's funny; let's
check it out.”

The second, more average group, the central part of the bell curve, if you will, was a little
more dismissive, of, you know what, that's interesting, but highly unlikely. “While you're
at it, you might as well also look for Paititi. That lost city of gold is going to help you fund
your research.”

There was a final group, really personified best by the gentleman from the mining
company, that just thought, “That's stupid. Don't waste my time.”
 As a whole, I think that we are very much geared towards the average. We teach to the
average. We serve to the average. We try to create things for that central part of the bell
curve. Just from listening to the podcast, just from knowing other stories, knowing my
story, knowing the story of other explorers from National Geographic, for example, who
have done amazing things, you can't listen to that average.

HOFFMAN: ​It’s so important — for entrepreneurs and anyone with an outlier idea — to
remember that not everyone has the entrepreneurial mindset. Many people will tell you “That’s
crazy. That’s risky. You’ll never succeed. Lots of people have tried this and failed. What makes
you different? Why don’t you just take a nice safe 9-to-5 job?”

So if you’re the kind of person who gets discouraged or bullied out of your idea, you might want
to do what Sara did — and keep it to yourself.

But there’s also a real advantage to feedback. As I said earlier in the show, I do my best
thinking when I’m around people who challenge me, who poke holes in my ideas, and who can
tell me where the landmines are. This is one of the advantages, in fact, of taking investment in
your company. Each time you pitch your company, you get valuable feedback. Even from the
“nos” — especially from the “nos.”

But Sara didn’t take investment. She started Spanx with the $5,000 she had in the bank. And
while I would never recommend this route to anyone, for a whole range of reasons that center
on speed, support, and sanity, you have to admire that she grew a billion-dollar company
without ever taking outside investment. Her reason? She didn’t know it was an option.

BLAKELY​​: I just didn't even know that I could go try to raise $40 million, Reid. And I
think I'd be not quite as tired right now. I'm really tired.

HOFFMAN​​: But well I mean your demonstration of grit is simply awesome.

BLAKELY​​: Thank you.

HOFFMAN: ​My advice to each of you: You don’t have to be quite that tired. But you will need
unwavering persistence. You have to search high and low for your idea, putting yourself in
situations where inspiration is most likely to strike. You have to act once you find it; surround
yourself with people who can help, and seek feedback from those who can help build your idea.
And you have to persist through the inevitable failures and setbacks and naysayers.

And when you start to bring that idea into the world, don’t let massive gaps in your knowledge of
how to scale your product get in the way. What you don’t know can actually work to your
advantage.
 BLAKELY​​: I like to tell people what you don't know can be your greatest asset if you let
it. If you have the courage. You know a lot of us second guess ourselves and think well I
didn't go to school for this or I'm not an expert so we don't ask the questions or we don't
pursue it.

HOFFMAN​​: And after that, you just might reach your goal. Remember how Sara set her sights
on the Oprah show? Well...

BLAKELY: ​So I invented this product and I sent a gift basket to Oprah of the product
with a note in it and found out Andre who dresses her put it in her wardrobe and she put
it on and loved it and basically has worn it everyday since. So I ended up on Oprah’s
Favorite Things, which was really helpful.

HOFFMAN:​​ Describing an appearance on Oprah as “helpful” is like describing the Universe as

“large.” It’s a vast understatement. But here’s the thing. Sara’s entrepreneurial journey didn’t
end when she reached her goal of appearing on Oprah. She still had years and years ahead of
her, where she built brand awareness one customer at a time.

And what about our explorer, Andrés? Remember that moment of euphoria, when he finally
breathed in the steam of the boiling river? Turns out: It too, was just the beginning.

RUZO: ​My goal was to go in, figure out if this legend was real and then, yay, how cool!
The Boiling River exists, legends come to life. But there was a darker side, and that
darker side was the question of why the jungle is disappearing.

This place is as wonderful as all of the legends and all of this stuff says that it is. What
are you going to do about it? Because one thing that is certainly disappearing just as
quickly as the jungle are traditional belief systems and traditional respect for the jungle.
What do you do? We ended up starting a non-profit, The Boiling River Project​. ​If we do
want to protect the jungle, we need to find value in it. We need to find value in those
trees standing up, rather than being cut down.

HOFFMAN:​​ You can learn more about the Boiling River Project on our website,
mastersofscale.com.

And with that, I’ll revise my theory. To find your big idea, you have to look for it. And look for it.
And look for it. And then act. And know that this is only the first step in a long entrepreneurial
journey.

I’m Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Selina Tobaccowala

CHERYL KELLOND​: I'm driving this like huge rig that's like 35 feet long over highways
and bumpy roads.

HOFFMAN​: That’s Cheryl Kellond, entrepreneur and amateur trucker. Last December, she
rented a three-quarter ton pickup truck and an Airstream trailer—picture a massive chrome
Twinkie on wheels. Then she drove some 1,000 miles across Colorado to meet her customers
face-to-face.

Cheryl runs a scrappy little healthcare company called Apostrophe, Inc. They have a great
tagline: “We make healthcare suck less.” How? By helping employees at small- to medium-sized
businesses avoid staggering medical bills. Cheryl couldn’t understand why so many diabetic
patients wound up in the emergency room. A simple visit to the doctor would have saved them a
fortune.

KELLOND​: We're like, “Why aren't they going? We just need to get out in the field.” And
so it seemed like a great idea—we're like, “Oh, I know what we'll do. We'll rent this
Airstream trailer, and we'll do a lightweight mobile clinic for a week. We'll invite people in
for free biometric testing and quick health checkups, and while they're there, we'll talk to
them to figure out what's going on.”

HOFFMAN​: Roughly 45 minutes into the road trip, Cheryl had an answer. Patients were hit so
hard by unexpected bills, they avoided doctors entirely. She calls the insights from this road trip
invaluable. But they came at a steep price.

KELLOND​: The trailer disconnected from the truck because the bolt fell out, and then I
had to reattach it. And there's an electronic hydraulic lift, and the wire had frayed. So it
starts sparking and smoking, and this small electrical fire breaks out on the hitch. I'm
freaking out. There’s sparks everywhere—the whole thing was ridiculous. There’s
sparks and flames shooting out of this electric motor, right next to the propane tank.

HOFFMAN​: This is going to sound crazy, but I’ll say it anyway: Cheryl had it easy. I’m not
talking about her road trip; that was gruelling. But her decision to put out ​that​ fire—it’s a no
brainer. She sees sparks and a propane tank. It’s like, two plus two equals [explosion sound]. If
only every decision could be so simple. Short of your office actually catching on fire, you’re
almost never going to face a decision like this as an entrepreneur.

Instead, you’ll face figurative fires—a lot of them, more than you can handle. And you often
won’t know which one to stamp out first. I believe if you try to put out ​every​ fire, you’ll only burn
yourself out. The best entrepreneurs? They let fires burn.

[THEME MUSIC]
HOFFMAN​: This is Masters of Scale. I’m Reid Hoffman, co-founder of LinkedIn, an investor at
Greylock, and your host. I believe smart entrepreneurs don’t try to fight every fire. They have to
let ​some​ fires burn—and sometimes ​very large​ fires.

When you have a fast-scaling company, there will always be metaphorical fires. Some of them
flare up suddenly, demanding your attention. Others build slowly in the background, threatening
to spread if they aren’t extinguished. If you spend all of your time fighting fires, you may miss
critical opportunities to build your business. You’ll be all reaction, and no action. But if you let
fires go on too long, you’ll get burned. Deciding which fires you let burn, and how long you let
them burn for, can make the difference between success and failure.

The fundamental rule of customer service has long been, “The customer is always right.” But in
a fast-growing business, you often have to make a choice between serving your existing
customers or reaching new customers. And if you’re growing exponentially, it’s a no-brainer.
For scale companies, the rule is, “Provide whatever service you can as long as it doesn't slow
us down”—and that may mean no service.

Think I’m exaggerating? Back in PayPal’s early days, we neglected customer complaints, even
as users grew exponentially.

HOFFMAN: ​And because we had a customer service department of three people, we

quickly started going in the hole around 10,000 emails a month—e.g., each week there
were an additional 10,000 emails that we didn't respond to. And customers got very
frustrated with this.​ ​First, a few phone calls started trickling in with customers who had
discovered our corporate phone number, and were dialing extensions at random to try to
reach somebody. And then very quickly, it became, all of the phones are ringing. And
then very quickly after that, probably hours, all of the phones are ringing 24 hours, seven
days a week. So what did we do? We turned off all the ringers on our desk phones, and
started using our cell phones for business. Because as paradoxical as that might sound,
where you would say, “We're supposed to be customer focused; we are listening to our
customers.” The problem is we have to treat the future customers, not just the current
ones. And if all we did was the current ones, we'd never get to the future customers.

For example, there was this one guy who felt that he wasn't getting his payments, and
needed the payments. He literally drove from Las Vegas to Palo Alto to come to our
front-door office. He asked for customer service, so that meant Laurie went out to go see
this relatively tall, bulky gentleman—and came back in and went, “Oh my god, there's an
angry customer here.” And so I went, “Hmm, what do we do?” Because we don't have
security, we don't have any plans for this, first guy who showed up. And there were
others. And so I went, “OK, Jamie Templeton is another six-foot-tall guy. So Jamie and I
will go out with Laurie to go talk to this guy.”
 It wasn't my phone number, but there were people showing up at the front door. And at
that point, we put we put a badge on the front door.

HOFFMAN​: And we let those complaints continue, until one day, we were positioned to solve
the problem all at once. We flew out to Omaha, set up a call center. Within two months, a
200-person customer service department was up and running. Problem solved—and I wouldn’t
have solved it a moment sooner.

At its core, this is a question of triage, of smart prioritization. One place to start is to think about
how you might normally approach your to-do list. It can be a tidy, logical, satisfying process.
Brian Chesky loves it.

COMPUTER VOICE​: Brian Chesky is the co-founder of Airbnb.

BRIAN CHESKY​: I have this kind of interesting way I do a to-do list. I make a list of long
tasks, and I try to be as exhaustive as possible, and then I try to group them. I say, it's
like a game of leverage. What one action can take care of those three? And then I do it
again. And I do it again. If you do that enough times, if you have a list of 20 things to do,
you end up realizing, “I don't need to do 20 things. If I do these three big things, the other
20 things will kind of happen as outcomes or outputs of it.” So it's just like doing fewer,
bigger things.

HOFFMAN​: That’s a great way to solve the known problems on a normal day. But what about
the great unknowns—the problems that flare up unexpectedly, and on a daily basis? Good luck
stack-ranking that mess. I guarantee you, in a fast-growing company at any stage—but
especially in the early stages—a list will give you no peace of mind. Yesterday’s wisp of smoke
might be today’s five-alarm fire. To really master the art of letting a fire burn, you need nerves,
vigilance and practice—lots of practice.

Selina Tobaccowala is as battle-tested as they come. She’s a serial entrepreneur who’s been
disrupting industries ever since she started coding in her dorm room in the 1990s. She’s now
the co-founder of a new fitness app called Gixo. Before that, as co-founder of Evite and
president of SurveyMonkey, she rode through two punishing and exhilarating waves of demand.

She can tell you about the blazes behind the scenes of those massive successes. Some fires
are big, some are enormous, and one you might call the tech equivalent of Chernobyl. We’ll pick
through a few of those smoldering ruins in a moment.

So how did Selina master the art of fighting fires? You have to go back to the early days of the
dot-com boom, when she was an undergraduate student at Stanford. Selina co-founded Evite
with her college friend, Al Lieb. Evite, you may recall, became the dominant platform for online
invitations in the late ‘90s. It was also only one of three business ideas that Selina and Al were
hatching in their dorm room simultaneously. Those are the breezy, experimental days of a
startup, when you can spitball ideas without suffering much blowback from users. Selina and Al
might have continued working on three ideas at once, until, one day, Selina stumbled on their
priorities, quite literally.

SELINA TOBACCOWALA: ​I am very clumsy, as you know, and I tripped over the cord
of our $200-dollar Fry's computer that was beneath our desk. And I'll never forget,
because then our phone rang and somebody said, “What happened to Evite?” And we
immediately plugged it back in, we looked at the database, and we were just surprised
about how naturally the product had grown—because there was a built-in viral coefficient
into the product that we hadn't really realized.

HOFFMAN​: Did you know the term “viral coefficient?”

TOBACCOWALA​: Absolutely not. [Laughter] At the time, it was more just the fact that,
“Oh, well, if people invite other people, other people will see it.”

HOFFMAN​: Now this is the day every founder dreams of—customers complaining about a loss
of service. They like you! They really like you!

Before you gush like you’ve won the lottery, you have to consider the flipside of passion. The
users who love you are also liable to turn on you. Think about how Selina got a call from that
angry customer in an instant. She’s being held accountable, like any other executive. She can’t
say, “Look, I’m barely drinking age, and my dorm room is a mess.” As soon as your users can’t
live without your service, you’re a mature business—and that’s a heady responsibility. Few
startup founders truly grasp what happens after users ​really​ like you.

TOBACCOWALA​: We did not, at that time—being 22 years old, barely graduating from
college—that we were thinking about, “Is this something that could scale? Is this a
business that could scale? Is this a product that could scale?”

And so a lot of what we realized is, suddenly we hadn't actually thought that much about,
how do you create hardware redundancy? How do you create a database redundancy?
And so we had multiple times where the site would just go down, which was more
normal in 1999-2000. But it was still something that we had to learn very, very quickly as
entrepreneurs. And just how do you create operational excellence is something that you
were learning on the job, versus coming into experience with.

HOFFMAN​: You’d be surprised how many successful startups, the celebrated “overnight
successes,” flirt with disaster the following morning. Selina’s experience is hardly unique. Take,
for instance, my friend Hadi Partovi, the co-founder of the educational non-profit Code.org. Back
in 2007, Hadi and his twin brother Ali, launched iLike, a music discovery app. It went live as an
early application on Facebook, back when the social network had only just over 20 million
monthly active users.
 HADI PARTOVI​: And it just exploded in popularity.

HOFFMAN​: The way Hadi describes it, you’d think 20 million active users turned their heads, all
at once, and shouted, “More!”

PARTOVI​: We had planned to have two servers running this, to judge interest. And
basically within 30 minutes, we realized two servers wasn't going to be enough. So we
immediately doubled it, and then we doubled it again, and then we doubled it again, until
our entire server farm of I think 32 servers, we could see that by the end of the weekend
we'd run out of servers.

And it was Saturday of Memorial Day weekend. So it's kind of crazy. We literally rented a
UHaul truck, and called up people just basically asking, “Can we come to your data
center and borrow machines? We’ll buy them from you, we’ll borrow them from you, we
just need them immediately.” And there was a whole bunch of us basically spending our
weekend literally unpacking and racking these machines to get it up and running.

HOFFMAN​: The funny thing about this messy rollout is that it’s a recurring story across Silicon
Valley. A product goes viral, the team is caught flat-footed, and they go into a wildly inefficient
scrum. You might be wondering, what’s the deal with these entrepreneurs? Hasn’t anyone in
Silicon Valley heard of a contingency plan? I assure you we have, and I can only reply, ”Who
has time for a contingency plan?”

This isn’t a quirk of Silicon Valley. It’s a competitive strategy. You don’t just want to be the
first-mover into a new market. You want to be the first-scaler. You have to seize every last
opportunity for growth — even if it means serving customers on a delusional scale.

LISA CURTIS​: So I sometimes talk about founders who have this delusional version of
reality.

HOFFMAN​: That’s Lisa Curtis, co-founder and CEO of an energy snack and drink company
called Kuli Kuli. Their secret ingredient is a nutrient-rich leaf called moringa; it’s a well-known
plant in West Africa. In the US? Not so much—though I’ve been steeping moringa leaves in hot
water lately, and I have to say, it’s amazing stuff. Lisa saw an opportunity to scale the moringa
market here in the U.S. Whole Foods wanted to partner with her and develop a new energy
drink.

CURTIS​: So we said “Yes, let's do it.” And then Whole Foods said, “We want to launch it
nationwide in January.” And this was June. I looked at my co-founder—and she does our
operations—and she just started shaking her head. And I distinctly remember being on
the phone and saying, “Yep, we'll do it, we'll get it, we'll make it happen.”
HOFFMAN​: So what happened? Those super-hearty moringa leaves clogged the machines on
the factory floor. Lisa’s team scrambled to find a new factory. A snowstorm delayed their first
shipment. Tempers flared. Buyers got upset. Then, at last, the big day arrives.

CURTIS​: At the same time we were sending out to 435 stores across the country, we
also had a batch of samples shipped to us. We did sort of like a, “Cheers, we did it!” And
then we all kind of like made this face of like, “Oh no. This is not what we thought.”

HOFFMAN​: The taste was fine, but the texture? Gritty. Cue another few months of panic. They
discover another magic ingredient, xanthan gum, to smooth out the texture. And voila, they had
a product that was ready to scale—after a massively botched launch. So what’s Lisa’s take on
this whole perfectly avoidable mess?

CURTIS​: I think it was still the right answer to say “yes.” Obviously, hindsight is 20/20,
but I don't think I would’ve changed saying “yes” and seizing the opportunity.

HOFFMAN​: Kuli Kuli is now available in 3,000 stores, quadrupling its footprint in a year, thanks
to that Whole Foods launch. What’s important about this story is that it’s full of unforced errors.
And I would argue that those errors are fine, so long as you’re pursuing a massive growth
opportunity.

When you’re moving fast, you can't say, “Oh, we're going to study this for six months. We're
going to be perfectly wise and avoid a lot of basic problems.” Because then you're six months
behind—and ​that's​ what’s unwise. Rather than prepare for every possible fire, you have to
embrace the wisdom of intelligent triage.

When I asked Selina how she acquired this uncommon wisdom at such a young age, she
explained that all fires look the same when you’re young. But one terrible blaze can give you a
healthy perspective on the rest.

HOFFMAN​: You were a college student back then. Is the way you fight fires now
substantially different than the way you fight fires then?

TOBACCOWALA​: The biggest difference is probably that I get less panicked about fires
when they happen—because you’ve fought so many of them, and you have a much
better perspective of, “Where to start?” Versus the, “Oh my god, people are depending
on me. The site is down and I don't know what to do here.”

I think that's probably the biggest change, is understanding that. And also I think not
feeling so bad about the fact that you are going to have to throw some resources away
in the short term, and as long as you explain that to people as they're doing the work,
they also understand—versus feeling like you're always trying to find that perfect
solution.
HOFFMAN​: When you’re letting a fire burn, it’s not simply up to you to wage a lonely battle with
your own nerves. Your team may start to get the sense that, like the band on the Titanic, you’re
fiddling while the ship sinks. You have to show them that yes, you see the problem, and yes,
your neglect is deliberate.

Selina learned to telegraph calm after she left Evite in 2001. She moved to London, where she
served as Senior Vice President of Product and Technology to the company TicketMaster.

TOBACCOWALA​: So throughout my career, in most of my reviews, the feedback I

would generally get is, “You need to be more patient.” I actually think the thing that
taught me the most patience was becoming a mom, realizing that it doesn't really help to
to snap at a child—or an employee, obviously.

But I think that in the sense of the patient side was was, “How do you actually calm down
a situation”—especially when things are going crazy, or going wrong—and, “How do you
get people communicating well?” Because the thing that starts to happen when things
are broken, is communication is the first thing to break down. And so that was the thing
that I realized was simple. It was back in the day before Slack, it was like, “Get
everybody on a conference call, make sure everybody has all the information, and get
everyone to be calm and work through the problem.”

And we had to do that quite a bit at Ticketmaster, when there was massive on-sales.
Michael Jackson, U2 was going on sale, we had people from around the world, that if
there was a problem, that would get on a call. And there would always be a triage
leader, and it was very much, “OK, the first and most important thing is ensuring that
there's fantastic communication.”

HOFFMAN​: Now this is exactly the sort of calm, measured management that startups yearn for.
And there was one startup in particular in desperate need of Selina’s help. It was a funky little
website called SurveyMonkey.

The founder, Ryan Finley, built an incredibly popular tool for online surveys, and succeeded with
an astonishing shortage of everything a company needs to scale.

TOBACCOWALA​: The founder of SurveyMonkey is an amazing guy. If you think about

the fact that this company started in 1999, in the Midwest, and then he picked up and
moved to Portland sight unseen​—​just because he found the Midwest too cold. But if you
look at his [?ten-year] trajectory, it's amazing. He built the business without a penny of
funding. He invented the freemium model, or at least was one of the first people in the
world to use the freemium model. There was essentially two developers, the founder, his
brother, and 10 customer service agents—and that was it.
HOFFMAN​: SurveyMonkey’s former CEO, and departed friend Dave Goldberg, was well aware
that his team was understaffed and in need of an experienced firefighter like Selina. So in 2009,
he started selling her on the founder’s vision. It was an uphill battle.

TOBACCOWALA​: I would say every single person underestimated SurveyMonkey, just

because of the way it looked. Every product engineer—and even myself—where you
walked in, and the first thing you thought was, “Surveys? Is this that interesting?” Both
from my standpoint, and then you looked at the product, and thought, “Well, this looks
like it's from 1999.” And so everybody underestimated both the size of the business, as
well as just the true consumer value that the product was actually providing

But when I heard his vision for building out a product where not only were you listening
to other people's voices—and being able to make impact, to make change—but also
building a platform for a data business. It was truly inspiring.

Two days before I came to interview, I realized I was pregnant. And I flew back to
London, and when I landed, I had an offer in my inbox from Dave from SurveyMonkey.
And I wrote him back a note, and I said, you know, “I want to negotiate my comp, and I
can't leave because I'm on a European contract for at least three months—so I have a
long wait. And I realize that I am in early stages of pregnancy.” And I wanted to give him
that opportunity to say, “Sorry, I can't make this work waiting three months.”

And he wrote back within five minutes, and told me that he wanted to make
SurveyMonkey a place where you could build a family, where you could create a culture,
where we could build a big revenue business. But at the same time, by bringing in
people with experience, we could actually also make sure that we could have dinner with
our kids.

HOFFMAN​: Sounds great, right? Every fast-growing startup sounds great from the outside.
Then as you move closer, you start smelling the smoke.

TOBACCOWALA: ​There were three of them that were coding—that is ​amazing​ for a
company doing that much revenue. I mean, the margin of the business was
unbelievable. But when you have a technology stack that’s built for three people to code,
and then you’re trying to scale an engineering organization, it doesn’t work.

HOFFMAN​: Then, Dave dropped a bombshell. Selina’s about to find out just how many fires
were raging in the background. You might be tempted to think SurveyMonkey was wrong to let
this go, but you’d be wrong.

TOBACCOWALA​: When he was interviewing me, he told me, “There's no backup.”

HOFFMAN​: By no backup, Dave meant the survey data, the bread and butter of the business,
could vanish without a trace.

HOFFMAN​: Can you explain what would have happened if a server failure wiped out
SurveyMonkey’s data?

TOBACCOWALA​: If the system had gotten corrupted, the data had gone down, the
business would have been done—because people come back to the same product
partially because you want to see your data and trends over time. And if you lose that,
you potentially lose the entire business.

HOFFMAN​: So in other words, Chernobyl.

TOBACCOWALA​: Yes.

HOFFMAN​: Crazy as it sounds, every startup, at some point, will flirt with a Chernobyl. And
there’s only one sensible response to a potential nuclear meltdown: think like Rain Man.

Fans of that movie will remember Dustin Hoffman’s character sitting at the blackjack table, eyes
darting, as he calmly calculates the odds of a winning or a losing hand. I’m no autistic savant,
but I try to maintain that calm rationality when I’m faced with a crisis.

I will assign probabilities, I’ll assign vectors of probabilities—is a probability going up or down?
Down better, obviously. I’ll say, “OK, what's the actual damage if it hits?” And then, is it
correctable after it hits?

So if it's a definite fatal—OK, we have this possibility that the business is just going to be over.
Boom. Full stop. Done. And by the way, almost all start ups start in that position. LinkedIn was
years before it had a backup database. Now we had backup data that we could reload, so could
come back in a day or two.

But the fail-over system, that was probably six years in. So you look at it and you go, “OK we
have this really valuable business. This could kill it. Let's adjust it.” But, by the way, what's your
probability? Is it 0.1% percent, or .01% percent every day? Well then, actually in fact, you can
you can solve it in three months or six months. It was like, “OK, that doesn't add up to a lot over
time.” If it's one percent per day over 30 days, then all of a sudden you're 15% percent. You’re
gonna be dead in 30 days, 15% percent. “OK, let's solve it now.”

So when the SurveyMonkey team sized up the odds of a data loss, they pounced.

TOBACCOWALA​: The team fixed it really, really quickly, in terms of, put in at least a
copy of the database. We absolutely not only were stressing about the situation, but very
quickly trying to rectify it, to ensure that that scenario didn't happen.
 HOFFMAN​: And was thinking about the potential Chernobyl—the worst case
scenario—invigorating, or distracting, or both?

TOBACCOWALA​: It's always invigorating, because you have to balance the, “How do
we solve something that's on fire very quickly?”

With, “How do we make sure that you're building out a long-term solution, and not
wasting a bunch of cycles?” And that's always a hard, but very fun, challenging problem.

HOFFMAN​: Chernobyl is invigorating. Now that’s an experienced firefighter talking. Once she
had that blaze under control, Selina worked her way down a long list of troubles.
SurveyMonkey, like every fast-growing startup, had no marketing plan, no strategy for
international users, and a mess of code that made every customization a headache. Selina, in
turn, hired engineers, marketers, UI designers, translators—an army of specialists to clear away
impediments to growth.

But what I find fascinating about her story is the fire she left burning in the background.

TOBACCOWALA​: Yeah, people definitely called the SurveyMonkey web design ugly,

HOFFMAN​: This wasn’t her personal opinion—everyone told her so.

TOBACCOWALA​: And people kept saying, “Hey, you know, this thing doesn't look nice.
The thing doesn't look pretty.”

HOFFMAN​: The critiques continued for years.

TOBACCOWALA​: But from my perspective, what I was more focused on was the fact
that people loved the product, and it was performing. And so I was going to let it be ugly
for the sake of being able to actually build a great business.

HOFFMAN​: And so was that one of those cases where you're like, “OK, I hear you. It's
an important thing to do later—but triage to a tertiary concern or a secondary concern.”

TOBACCOWALA​: People spend a lot of time building beautiful websites, and I think that
that's important in certain types of businesses. When we’re talking about a business
when you're trying to get somebody through a very difficult experience in something
more functional, it's far more important that the product is easy to use—and beautiful
and easy to use are not always the same thing.

HOFFMAN​: Although I think Steve Jobs thinks differently—but other than his particular
genius, which there's only a few of.
 TOBACCOWALA​: And his products are beautiful and easy to use. Obviously, if
you can do that, that's magic. But I think if you have to prioritize one of the two, I
would always put “easy to use” over “beautiful.”

HOFFMAN​: Let’s set aside the “beauty versus ease-of-use” debate. They’re both obvious
virtues. Focus, instead, on Selina’s willingness to pit one virtue against the other. Selina can
say, “Apple’s products are a thing of beauty. They’re magic. Wouldn’t we all love to have a
product as eye-catching as the iPhone? Nonetheless, I won’t fight that battle today, possibly not
for years”—there’s magic to that decision as well. We shower so much praise on the
entrepreneurs who knock a product out of the park, we forget to celebrate all of their brilliant
punts.

Jeff Bezos, CEO of Amazon, is admired for a lot of things—design is not one of them. Look at
the Amazon website. It’s not going to win a Webby award anytime soon. I can guarantee you a
really good product person looking at that website would go, “I know how to get a much stronger
engagement loop on this page.”

What Bezos knows is that what matters most to people is convenience, price and speed. That's
what customers like, and that's what Amazon gives them. And Bezos won't allow anyone to vary
from those three goals at all. Even if they say, “But you could do this.” “No, no, no.
Convenience, price, speed.”

Jeff and Selina don’t just say, “I’ll let that fire burn.” They ​commit​ to their decision, even as the
smoke creeps under their door.

HOFFMAN​: Can you recall a specific example of a glaringly ugly design flaw?

TOBACCOWALA​: So when you finish paying for the product, and you finish checkout,
there is this big, massive heart that came to say, “Thank you.” And everybody was just
like, “Ah, that’s a terrible image!” But you know, we wanted to retain some of the
essence of the product. There were certain pages like that, that people would just sort of
shudder at. But that page, as an example, the consumer has just paid you, and so is that
the most important page to improve? No. It's most important to get them back into their
experience quickly, to let them finish out their survey.

My fellow investor at Greylock, Jerry Chen, is unflappable in the face of complaints. He's a
former vice president of VMware, one of those behind-the-scenes tech companies that allows
you to connect and secure applications across devices. Jerry set an unusual measure of
success for his team.

JERRY CHEN​: The worst thing is when you launch a product, and no one cares or
notices. And if you have sales reps complain, or customers file bugs against it, then two
 things. One, you're releasing while you're still embarrassed, a la your rule, and B, people
only complain when they care. And so I always set as a metric, how many complaints did
we get?

HOFFMAN​: As a positive metric.

CHEN​: As a positive metric, because people are engaged.

HOFFMAN: ​You need fortitude to accept these fires as a byproduct of growth, because if you
leave one fire burning long enough, it will merge with another fire. And that’s when your strategy
of intelligent triage will be sorely tested. SurveyMonkey’s web design, for instance, wasn’t just
an eyesore for users, it actually hampered Selina’s ability to recruit talent.

TOBACCOWALA​: It’s like, don't judge a book by its cover, but people are sort of judging
this product as being a non-Silicon Valley-based, non-beautiful site, and underestimating
both its consumer love and its financials.

HOFFMAN​: Given that it was affecting recruitment, did that put pressure on you to try to
address the design, or did you have some other way of trying to overcome the
recruitment challenge?

TOBACCOWALA​: Once we got people in the door, we were able to get them excited.
But the hard part was, how are you getting people in the door? And so it took more
effort, whether it was going to [?Pi Con] meetups, whether it was going to [?Pilates],
whether it was going out there and just talking to people, talking to engineers, talking to
product people, using your network to get people to enter. And so that was a bigger
challenge for us. And part of that, again, was because people were judging what the
business was, what the product was—and until you were able to interact with them and
pitch them, you weren’t able to break that barrier.

HOFFMAN​: Selina hints at another benefit of letting fires burn: you want employees who will
rush into a burning building alongside you. And there are two ways to spot these employees.
You can engage in all sorts of behavioral questioning. You know, “Suppose you had 10 seconds
to put out an electrical fire next to a propane tank. How would you handle it?” Or you can just let
the smoldering parts of your business speak for themselves—and this is key. Most of us are
willing to fight fires; it’s a smaller subset of people who are capable of noting the presence of a
roaring blaze that might soon cut off all escape routes, while staying focused on the blaze that’s
about to consume them.

And this isn’t simply a matter of hiring battle-tested employees, because even the most
experienced firefighters will occasionally miss a five-alarm fire in the making.

Selina is well on her way to scaling her third startup, Gixo. She launched the app this summer.
It’s an ambitious venture to bring live fitness classes to your smartphone. And despite her
experience, she readily acknowledges she hasn’t seen it all. She knows her blind spots. And
she’s already hiring employees who can help her scan the horizon for smoke signals.

HOFFMAN​: So what would you say, in order to accelerate your younger self's learning
of which fires to let burn or not? What advice would you give your younger self? And one
is, not everything is fatal—don't panic. But what would the other things you'd say are,
here are some of the principles I now apply that I would want you to learn faster?

TOBACCOWALA​: So I'd say some of the principles: one is, is that is important to do
that learning fast. Putting things out the door fairly quickly, and getting consumer
feedback, even to a percentage of the audience—that far helps avoid fires. If you get
some feedback from an audience, you start seeing what's happening to the numbers,
and that makes a huge difference in terms of avoiding fires.

I'd say that the second thing, in terms of avoiding fires, is hiring the right people. You
can’t expect that you—especially at 22 or 23, but even now—are going to know all the
different things. I mentioned before, design’s not a strength of mine. One of the first hires
we picked, so, as a great designer. And so it's balancing your own weaknesses with
great people, because you know that they're going to have the ability to see those fires
ahead of you.

HOFFMAN​: I’m Reid Hoffman. Thank you for listening.

Masters of Scale Episode Transcript: Sheryl Sandberg

REID HOFFMAN: ​When technologies become ubiquitous and essential, they also generate
opposition. Take PowerPoint, a product I use almost every day. There’s a whole cottage
industry of PowerPoint haters online. They publish essays with headlines like “PowerPoint
Makes Us Stupid” or “PowerPoint is Evil.” They dabble in politics. Like Switzerland’s
“Anti-PowerPoint Party.” Google it if you don’t believe me. You’ll find on their website a rousing
slogan: “Finally—do something!” And if any party stalwarts are out there listening, I have news
for you: Sheryl Sandberg, the Chief Operating Officer of Facebook, finally die lessd something.

SHERYL SANDBERG:​ I don't love PowerPoint presentations in meetings for me,

because I want them to be more discussions. So I kept saying, “Please don't bring
PowerPoint, please don’t bring PowerPoint” at Facebook for years—but everyone kept
bringing PowerPoint. So one day, probably more frustrated than I needed to be, I just
said, “No more PowerPoint at any of my meetings.”

HOFFMAN:​ There was just one problem. Sheryl’s words carry a lot of weight at
Facebook—sometimes more weight than she’d like. Before long, she found herself squaring off
against the PowerPoint enthusiasts. They’re not as vocal. You might call them the silent
majority.

SANDBERG:​ So then a few months later, I was getting ready to get on stage at the
global sales conference—so all of our global people from around the world—and I
looked at someone who was standing there—my friend Kirsten, who was in HR at the
time—and I said, “What are the things you think they’re going to ask me about?” She
said, “Well, everyone wants to talk about the PowerPoint thing.”

I said, “What PowerPoint thing?”

She said, “You know, the no PowerPoint thing, it's very hard to do client meetings
without PowerPoint.”

And I said, “What ‘no PowerPoint’ thing for clients?”

And I realized that my instruction, “No PowerPoint,” got translated through this large
organization as Sheryl says, “No PowerPoint in client meetings.”

So I got on the stage and I said, “One, I'm sorry, I didn't mean that. Two, it is on me that
if you all thought that, and that was a stupid idea, you need to speak up and tell me. Of
course you have PowerPoint with clients. Clients love PowerPoint. I don’t."

It was just a really good lesson that I needed to be super careful that things didn't get
taken too far, but also that I needed to make sure people could speak up.
HOFFMAN: ​There are great uses of PowerPoint and there are bad uses of PowerPoint. I’d
rather focus your attention on ​how​ Sheryl handled it. She doesn’t just want to be heard, she
wants to be challenged. She’s not afraid to be wrong, and she’s not afraid to change course.
And that’s what makes her a great leader at scale. Great leaders of fast-moving organizations
don’t just make plans, they break them.

[THEME MUSIC]

HOFFMAN: ​This is Masters of Scale. I’m Reid Hoffman, co-founder of LinkedIn and partner at
Greylock. On this episode of Masters of Scale, I’m going to test one of my theories on
leadership. The kind of leadership you need in an organization that’s changing fast—so fast that
the office you leave at night is different from the one you walk into the next morning. I believe to
lead an organization to scale, you have to be as skilled at breaking plans as you are at making
them.

Every day, there are new competitors, new threats, new opportunities. There’s no simple,
straightforward set of marching orders. It’s more like a dogfight. You and your team will be flying
upside down and at an angle sometimes.

Now Sheryl is one of those gifted leaders who’s made daring decisions at every level of scale.
She can run a team of four or 400 or 40,000. I wanted to talk to her about leading a company as
it scales, because she is literally the archetype for this kind of leader. You’ll frequently hear
investors, like me, say to founders: “We need to find you your Sheryl Sandberg.”

It’s funny, because if you had found Sheryl Sandberg at the beginning of her career, she
probably would have turned you down.

SANDBERG​: The main thing I was raised with is, “Don't go into business,” and “It's good
to be a doctor.” My father was a doctor. I have two siblings, they're both doctors, one of
them married a doctor. Being a doctor was good, it was giving back. Working in
nonprofits or the government was considered very good. Business was a little suspect.

I started my career working at the World Bank. I worked on leprosy in India, AIDS in
India, blindness in India. If you had asked me the day I graduated college if I would ever
work in the private sector, I would have thought you were insulting me.

HOFFMAN​: So Sheryl started out in the public sector. She spent seven years at the U.S.
Treasury Department, as chief of staff to Secretary Larry Summers. And in that position she
rubbed shoulders with the aristocracy of American business. CEOs from every industry. In the
late 1990s, she started to notice a certain type of executive who challenged all of her
preconceptions.
 SANDBERG​: People came into Treasury all the time, and most people wore suits. But
not Eric Schmidt.

VOICE: ​Eric Schmidt was CEO of Google from 2001 to 2011. He’s now Executive
Chairman of Alphabet, Google’s parent company.

SANDBERG: ​He looked, he felt different. Jerry Yang would come in—

VOICE: ​Jerry Yan was the founder of Yahoo!

SANDBERG: ​Those were the Yahoo! days. They looked, they felt different. It really felt
like they had this energy and passion around changing the world. I remember this one
day, I was with Larry Summers, and we had a lunch in New York. It was all the bankers,
everyone was wearing suits. It was very formal.

Then we flew across the country. Eric Schmidt picked us up in his car, wearing jeans,
and took us to a local pizza place with Jerry Yang. And we sat there, and they were
talking, and everyone's eating off each other's plates. And the stark contrast between
those two meals—the formality and the what felt very traditional about the world I was
living in, and the informality and the big ideas that were discussed at that dinner of what
seemed like the new world—convinced me that for-profit companies actually were
mission-based. And that's how I got to Google.

HOFFMAN​: Sheryl took the job at Google in 2001 and moved to Silicon Valley. Her title was
“Business Unit General Manager,” which sounds important. Incidentally, Google didn’t have any
business units to manage.

SANDBERG​: I remember my first week. Eric was busy and they were working on a big
reorg for the engineering department.

At the end of the week, I figured out what the reorg was. The reorg was every single
engineer would report directly to Wayne Rosing, who was the VP of engineering, so
about 200 engineers—that was the reorg. They were going to all report directly to him. It
was a crazy thing. Saying 200-ish people should support directly one person was saying
we don't want management, and that was exactly what they were saying. It was
unorthodox and cool and had the property that we really trusted our employees to do the
right thing. I learned it was different from the Treasury Department right away. Right
away!

HOFFMAN​: Probably minute three.

SANDBERG​: Minute three.

HOFFMAN​: It's fundamentally not a good idea to have 200 engineers report to one manager.
Among other things, you want your engineers to feel like someone’s paying attention to them.
I’m sure Sheryl could name all of the reasons not to do this. But to her credit, she doesn’t. She
adjusts to this strangely amorphous team by her third minute on the job. And that’s the reaction
time she’ll need, because Sheryl is about to learn what every leader of a fast-growing startup
knows: every plan is made to be broken.

SANDBERG​: My team was four people, and they were very worried we were going to
grow. So my first day I said, “Don't worry. We're all going to interview everyone.” Two
weeks later, the team was 12 people, and it was completely unreasonable to have a
person interview with 12 people. Plus, you only had 12 people to do any work, so if
everyone interviewed everyone—that didn't work at all. So this promise I had made to
make them feel good about scaling, I took away in a week.

HOFFMAN:​ The path to scale always, unfortunately, includes some broken promises, as Sheryl
would soon find out. Everything—from interviews to office space—changes as you grow. And
even a small take-back can matter to a team.

SANDBERG​: I'll give you another silly example that I don't think is silly—birthdays. We
celebrated everyone's birthday that day. Then it became that week. Eventually we had a
huge sheet cake with quarterly birthdays. My team was 4,000 when I left, and everyone's
name is on it. Now it sounds like that wouldn't matter, but it did—because if you started
out and we celebrated everyone's birthday, and we took that away, that was a problem.
Now I'm not saying, “Be mean and don't celebrate birthdays.” I'm saying, “Figure out
what your systems are going to look like later, and do it now.”

HOFFMAN​: I want to note a crucial distinction here: When it came to hiring new employees,
Sheryl failed to anticipate how quickly her plan would unravel. But in the case of birthday
parties, she did. And she worked out a solution: sheet cakes. That’s the key to leading through
scale. You can’t stop the onslaught of challenges. But you can identify the moment when they
force you to pivot—and start buying bigger cakes.

As the team doubles and triples in size, a skilled manager keeps a vigilant watch for systems
that are failing. But the best managers? They don’t spot changes on their own. Their team
surfaces problems for them. The trick is getting them to speak up.

SANDBERG​: When our team was growing, I interviewed everyone who joined globally.
And when we were at 100 people I noticed that the queue for my interview was a kind of
holding up our hiring process.

So I said in a meeting with my direct reports, “I think maybe I should stop interviewing,”
fully expecting that they would jump right in and say, “Absolutely not. You’re a great
interviewer. We need your personal recommendation on anyone on your team.” You
 know what they did? They applauded. And I thought to myself, “I've become a
bottleneck, and you didn't tell me—and that's on me.”

HOFFMAN: ​Notice what Sheryl focuses on here. She isn’t bothered by her team applauding her
decision to step aside. She’s disturbed by the fact that no one told her the truth. She knows she
needs ​everyone’s​ honest input to make the frequent, fast decisions Google’s business
demands. And that kind of openness doesn’t happen on its own. Leaders have to embrace
truth-telling. Especially when they learn that they are the problem.

SANDBERG: ​I thought my interview was that important, no one else did. I was their
boss, I was their manager. If they didn’t tell me, that was on me. I realized I had to make
it safe to speak up when I'm messing up.

HOFFMAN: ​One thing you should know about Sheryl is that she basically built Google’s engine
for growth. Her team powered AdWords, they ran the business that displays ads next to search
results. It may not sound like a thrilling breakthrough.

In fact, it became the lifeblood—the capital—that funds nearly all of Google’s innovations. ​ ​In
essence, Sheryl and her team were building the infrastructure for global online advertising. The
pressure to scale was immense.​ ​As her team swelled from dozens to hundreds, she learned to
lead in a fast-changing environment. One essential skill, as we’ve seen, is to spot unsustainable
systems.

But there’s a second skill that Sheryl would learn: how to hire people for roles that never existed
before. She learned about this when she interviewed for a role like that.

SANDBERG:​ When I was interviewing for jobs, I had a really nice experience with Meg
Whitman. I was interviewing at eBay.

VOICE: ​Meg Whitman is the CEO of Hewlett Packard and the former CEO of eBay.

SANDBERG: ​When I got to see her, I just said, “I don't have any relevant experience.”
And she said, “No one has any experience, because no one's ever done this before.” I
really took that lesson to heart. I did not go look for people with online ad sales
experience. And that's a good thing, because there was no one with online ad sales
experience.

HOFFMAN: ​So Sheryl had to hire people for roles at Google that had never existed anywhere
before. But she also had to hire them without knowing what she’d need in just a few weeks or
months. Changing organizations have changing needs. It can be hard to predict just how long
you’ll need a given skill set. And that's one of the hardest challenges of managing through scale.

I asked Bill Gates—who you might have heard of—how he wishes he had handled hiring in the
early days. He shared some wistful advice.

HOFFMAN:​ If you were to call your younger self and tell yourself, “OK, here are some
principles by which you should hire differently.” What would that phone call to your
younger self be?

BILL GATES​: When I was young, I always hired thinking our organization would grow a
lot. But the notion that these intelligences were as specialized as they are—I was so
wrong—I thought, partly because of myself, or misperceptions of myself, that, “Hey, I can
learn sales, what is that?”

You know, profit/ loss—you take the sales, you subtract the costs. Do you need to go to
business school? I don’t think so. I didn’t have enough respect for different, deep
knowledge, I didn’t have enough respect for good management—what really good
management is.

HOFFMAN:​ Bright young founders, listen carefully: you have to start swapping out what I call
“generalists”—those jacks-of-all-trades—with “specialists”—experienced executives who know
how to lead massive teams. I’ve seen companies swap upwards of a third of their managers in
18 months.​ Let me tell you, these are not easy conversations to have with the people who
fought alongside you in the trenches.

It’s one thing to make and break company plans. It’s another thing to make and break
commitments to human beings. It takes practiced diplomacy to navigate those decisions.

My friend, Selina Tobaccowala, has that type of diplomacy. She’s a serial entrepreneur who
co-founded Evite.com, an early online invitations service, and is now co-founder of a startup
called Gixo. I asked her how she thinks about hiring people who can scale with the company.

SELINA TOBACCOWALA: ​I think that one of the biggest learnings I had is, how much
are you hiring the right person for that time, and then, how much are you hiring the
person who's going to be the right person in 18 months or 24 months, as you're
growing?

And I'm not sure I always made those right decisions, but those were decisions you had
to keep revisiting—because you had somebody who was crushing it at that moment.
Then two years, three years down the road, they’re a manager—is super unhappy, or
isn't capable. But then at the same time, there were certain situations where we sort of
hired somebody who couldn't get their hands dirty. Then it was a very frustrating 18 or
24 months, if they made it that long. So I think there's this question—which I feel like I
don't necessarily have the answer to—but it is balancing, hiring the people who can get
the job done ​now​ versus hiring the people who will also be successful later.
HOFFMAN: ​This balancing act between who you need now, and who you’ll need later, is no
small feat. In the early startup stage, you need all-rounders who love to get their hands dirty.
Later on, you need polished managers who know how to delegate. Not everyone makes it
through every company turn, and not everyone is destined to be a manager. Some people are
best as individual contributors—as an engineer, not as a VP of Engineering.

The key to keeping a happy team as you scale is to give your employees a frame to understand
what's going on. You need to give each employee multiple ways to tell their own story of
hero-dom, so they can say to themselves, “I’m a major contributor, I matter here. I may not be
an executive, but I am making progress in my career.” Because the reflexive story that people
tell themselves is, “I’m the first product manager, so I'm going to be the head of product from the
time we’re five people in a garage, until we become a 10,000 person company.”

And that's actually pretty unlikely. Sheryl’s team at Google was about to grow from four to 4,000.
She had to hire for uncertainty—being ready to make and break plans. And she had to hire ​fast​.

SANDBERG: ​We needed to hire really quickly. So we started that “temp-to-hire”

program. We just hired people as temps. And then we would evaluate them over the
course of the first month, two months, and then we would convert the most successful of
them to full time. It was a great way to scale in those very early days, when we needed a
lot of work done very quickly.

It also got us to hire people we probably would have otherwise not hired: people who
didn't necessarily interview well, people who didn't necessarily have the background that
Google was always looking for. But they came in and did great work.

HOFFMAN: ​Hiring temps is a great hack when you need to hire quickly. But not every company
can rely on hiring temps. And there’s also a tension in every growing company between hiring
fast and hiring well. Founders have different philosophies on which to emphasize and when.

My friend Mike Cassidy has some rules around this which I asked him to share. He’s now
launching his fifth technology startup, Apollo Fusion. I want to tell you the secret sauce of his
new company, but I can’t—he’s in “stealth mode.” And he’s hiring quickly—but not hastily.
There’s a limit, he says, to how fast you should go.

MIKE CASSIDY​: If you count the hours in the day that you’re looking at resumes and
doing interviews, and then onboarding people—it’s hard. if you’ve got six people in the
company, you can probably only hire another six people in three months, and then
another 12 people three months after. That really is challenging.

HOFFMAN: ​What are some of your rules in early hiring?

CASSIDY:​ I think one of them is, a bad hire in the first 15 is fatal to the company. So
 really watch out for those bad eggs. I have a whole set of interview questions and
techniques that I am a really big believer in—trying to determine if someone is a team
player, versus, “I got my stuff done, the other person’s gotta get their stuff done.”

HOFFMAN:​ Mike Cassidy isn’t the only founder who puts a premium on each early hire. Mark
Zuckerberg, the CEO of Facebook, tells me he believes in setting the highest possible standard
for each role.

MARK ZUCKERBERG:​ So the single most important thing is to get the best people you
can around you. When I look at my friends who were running other good companies, the
single biggest difference that I see in whether the companies end up becoming really
great and reaching their potential, or just pretty good, is whether they’re comfortable and
really self-confident enough to have people who are stronger than them around them.
I've adopted this hiring rule, which is that you should never hire someone to work for
you, unless you would work for them in an alternate universe.

Which doesn’t mean that you should give them your job, but just if the tables were turned
and you were looking for a job, would you be comfortable working for this person? I
basically think that if the answer to that is “no,” then you're doing something expedient by
hiring them, but you're not doing as well as you can on that.

There are all these things that Sheryl, for example, is just much stronger than me at, and
that makes me better and makes Facebook better. And I am not afraid or threatened by
that—I value that. That's what makes Facebook good.

HOFFMAN: ​So there are times to hire fast, and there are times to hire slow. And in 2008, Mark
began a very slow professional courtship of Sheryl Sandberg. By this time, Sheryl had scaled
Google’s online sales team to more than 4,000 employees. Collectively, they brought in
two-thirds of Google’s revenue. This fact wasn’t lost on Mark when he first met Sheryl at a
friend’s Christmas party. And Mark also made a fast impression.

SANDBERG:​ I met Mark, and I was just inspired. I had been using Facebook. I saw its
potential to make us who we were—putting yourself and your picture and your real
friends and your real connection and your real birthday online—was such a big leap, but
it was one that really resonated for me, because it enabled us to have personal
connections. I believed in the mission, and then I just really believed in Mark. He had
energy and passion and big vision. He said, “Everything's going to be social.” Sounds
obvious now. Nothing was social then.

HOFFMAN: ​But how do you bring in a senior exec of Sheryl’s caliber? Patiently. Mark knew he
couldn’t reverse the engine on ​this ​hire. He had to get it right the first time.

SANDBERG: ​To say I had multiple conversations with Mark is kind of the
 understatement. He was a late-night guy. He didn't come into the office particularly early,
so he would come over for dinner at eight. I would literally have to kick him out at 11:00
or 12:00. We had dinners once or twice a week for months. I think way earlier than he
decided he wanted to work with me, I decided I wanted to work with him.

That was the only way I was going to have six hours a week of time I didn’t have of
endless conversation. But I think he was right, because by the time we worked together,
we had really talked about who we were, what we believed in, what we thought the
potential was of Facebook to scale, how we would scale.

We also got the world's best advice from my husband, Dave. Mark and I didn't agree on
a lot of substantive things at that point. Dave told me, “Don't work any of those out. You
never will.” He said, “What you want from Mark is process agreement on how you will
work things out. Because even if you work all the questions you have out now, they're
going to change.”

HOFFMAN: ​I’d like to take a moment to reflect on Sheryl’s awesome husband David Goldberg,
whose death in May 2015 came as such a shock to everyone who knew him. He was the CEO
of SurveyMonkey, and a generous mentor. This piece of advice is just one of the ways that he
lives on.

SANDBERG:​ So we agreed we would sit together, we agreed we would always do the

first meeting of the week on Monday, and the last meeting of the week on Friday. I
asked him for feedback; he made it mutual. We would always give each other feedback
every week. And it will be nine years next month.

HOFFMAN: ​Notice how Sheryl and Mark take disagreements as a constant feature of their
working relationship. If Mark and Sheryl had made promises to each other around specific
solutions to specific challenges facing Facebook at the time, they would have inevitably broken
those commitments. By promising they would always be frank, and work through
disagreements—that was a promise that they have kept. It’s a promise that sustains their
relationship to this day, and underpins their company culture.

You have to be intentional if you’re going to encourage debate. And there’s no one better to talk
about this dynamic than Margaret Heffernan—former CEO of five companies. She gave a TED
Talk called “Dare to Disagree,” and she offers a simple advice to leaders: “Show, don’t tell.”

MARGARET HEFFERNAN: ​I think constructive conflict is essential. It’s how

organizations think. One of the huge problems of running any kind of an organization is,
how can you create an environment where people feel it’s really safe to do that, where
they’re allowed to do it? And where people have, if you like, the robustness or maturity
not to take it or make it personal.
HOFFMAN: ​Sheryl, too, believes this focus on respectful disagreement and fast feedback is
what makes Facebook resilient as a company.

SANDBERG:​ We all need resilience. We need resilience as individuals, and the way you
build a resilient organization is, you learn from failure. You don't hide it, you embrace it.

So, what does that mean? You have to get real feedback for yourself, for each other.
You have to be open to feedback. You have to ask for feedback. You have to build in a
culture where, when I think you need to do something better, or you think I need to do
something better—we tell each other, and tell each other directly, and work it out. You
have to embrace organizational failure. You have to sit down and debrief when things go
wrong.

Why did they go wrong? What can we learn, and what can we do better? It's
organizations that hide things under the rug that don't create the resilience, because
they don't learn.

HOFFMAN: ​This willingness to acknowledge failure and embrace disagreement is a critical

advantage in a fast-moving industry, because it allows you to see mistakes earlier, so you can
know what to tear down and what to build up.

Thoughtful scale leaders thrive on disagreement, because it gives them the information they
need to test their ideas before they make and break plans. Indeed, they seek out colleagues
who won’t share their point of view.

SANDBERG​: The lesson everyone talks about, but I really mean, is you really do want
to hire people who are better than you are, and who are different than you are. This is
where we talk about diversity. I don't just mean racial, national, age, gender. All of that
diversity is super important. In addition to that cognitive diversity, which you get from all
those backgrounds, but also just personality diversity.

If you are a white male who likes to code and sci-fi movies, you probably don’t want your
whole team to be that. I think about David Fischer. David Fischer and I have worked
together at Treasury, at Google, and at Facebook. Personality types were just very
different. I'm much more up and down. I will get nervous something's not moving fast
enough. I will be exuberant, and I will be down. Not David. David is absolutely calm.
Over decades of working together, that balance has really been important, because
sometimes I’ll look at David and say, “This is an emergency.” He'll say, “No it's not
Sheryl, calm down.”

And sometimes I'll say, “David, you're not moving fast enough,” and he'll say, “You're
right.” I think Mark and I have that too. We are very different. We are separated
 by—obviously gender, 15 years, he's my boss, he's 15 years younger. Completely
different personalities, completely different working styles—and I think that served
Facebook well.

HOFFMAN: ​You can’t overestimate this kind of diversity. You have to have colleagues who offer
calm to your chaos, or put the occasional brakes on your speed. And it’s fortunate that Sheryl
and Mark balance each other out, because they would soon face one of the trickiest transitions
in Facebook’s history—an existential threat, requiring a rapid change of course.

We have a word for these kinds of evasive maneuvers here in Silicon Valley. We call it an
OODA loop. That’s a fighter pilot term. It stands for observe, orient, decide, act. The fighter pilot
who has the fastest OODA loop wins. The other one dies. If you’ve ever watched the movie Top
Gun, you’ll have a basic understanding of how an OODA loop works.

Tom Cruise’s character, Maverick, has a few bad guys on his tail. In a split second, he orients
himself to the enemy’s formation. Then he decides to perform a crazy aerial maneuver—he
acts, and he confounds everyone. Score one for the free world. Now I’m not suggesting that
tech executives secretly want to blast each other out of the sky. What they do want is to perform
slightly crazy, super-fast maneuvers, again and again.

You’ll often hear founders asking: What is the OODA loop of an organization or an individual?
Because speed matters in combat, and also in fast-moving industries. In 2012, Facebook had to
perform the mother of all OODA loops. Its users were migrating from desktop computers to
mobile devices at a startling rate. Sheryl and Mark faced a tough decision.

SANDBERG:​ Our products were designed for the desktop. We realized the mobile
transition was happening; it was happening way faster than we thought. It kept
outstripping our predictions. So Mark did this company all-hands, which he still does
when he wants to reset, or make sure we're on the right path.

And he stood up at the company all-hands and said, “We're going to be a mobile-first
company”—and he did it incredibly well. But then you know what happened the next
day? Nothing. People still came in with their desktop screenshots, because that's what
they knew how to build. So a couple of meetings in, Mark just said, “You know what? No
more meetings, unless your mobile screenshot is first.” Just by making that shift, he
made the shift in the company—and we really had to force it. The company really got on
board, but it meant retraining a lot of engineers.

HOFFMAN: ​So a shift on this scale tends to make your board members and shareholders a bit
antsy. Mark Zuckerberg shared their concerns. But the greater risk, in his view, was to take only
a half-hearted step toward a new market.

ZUCKERBERG: ​We made one really important strategy decision, which was, often
 when companies need to take two years or so to rewrite their whole app or software for a
new platform, they believe that they can't slow down feature development. So they do
two things at the same time: they try to design a new product, while rewriting the existing
product.

I think that that ends up dragging everything out for longer, and increases the chance
that you fail and die. So we made what was a pretty hard decision at the time, which was
basically, no new features for two years, which is kind of a crazy thing.

HOFFMAN: ​Fortunately for Mark, he retained a controlling interest in the company. He famously
turned down a $75 million buyout offer in 2005, followed by a $1.5 billion offer in 2006. This
afforded his team the latitude to perform some truly daring OODA loops.

SANDBERG: ​Mark's control enables us to have a long-term view. We were a newly

public company. We disappointed a lot of people in our near-term revenue. That's
because we only had so many engineers, and if we wanted to make money in the
near-term that quarter, we should put it on desktop ads, and we did not. We were giving
up a lot of current revenue for the promise of future revenue.

Mark and I sat in a room one day, and he looked at me, and he said, “We're going to do
this,” and I looked at him, I said, “You really can't be fired, and you're the only person
who can fire me. If you're in, I'm in.” It was a joke we had, but it's an important joke.

HOFFMAN: ​This ability for a leadership team to joke together, to think together, to take risks
together—it’s what holds an organization together. It allows them to work towards the same
goal, and orient thousands of people in the same direction. The constant course correction and
OODA loops—the making and breaking of plans—feels less disorienting in the hands of great
scale leaders.

And to be clear, you’re not going to achieve consensus on every decision. Employees may
disagree passionately about a dramatic change of plans. What matters is how you have the
debate, and what happens afterwards. Margaret Heffernan has a great example of this.

HOFFMAN: ​And that’s the truest sign of effective leadership—you invite discord, you welcome a
noisy, feisty debate. But you ensure everyone understands and works towards the same goal.
And this is where we reach the counterpoint.

Leaders at scale have to be ready to make and break almost every plan—that’s the general
rule. But there’s one plan you can’t break, one variable that must stay constant, and that’s the
company’s mission. It’s the North Star that everyone orients around. For LinkedIn, it’s
connecting people with opportunity. For AirBnB, it’s “Belong anywhere.” For Facebook, it’s
“Connect the world.”
 SANDBERG: ​The thing about leadership is you need people to follow you
enthusiastically. People will do what they’re supposed to do if they work for you.

But that's not what you want. You want to have an aligned mission. Rather than tell
people to march four steps, you want to tell people, “We're heading there, get there as
quickly as you can.” You have to repeat your mission and your purpose and the values
you care about over and over and over. Sometimes you’re like, doesn't everyone know
this? It doesn't matter. Starting out your meetings with, this is the Facebook mission, this
is the Instagram mission, this is why WhatsApp exists, is so powerful—even if everyone
knows it by heart—because it reminds you where you're headed and why you're going
there.

HOFFMAN: ​The repetition of mission is extremely important, and I've seen it in all good scale
leaders. It's actually one of the things that I had to learn myself, because I had a tendency to
think, “Hey, everyone knows our mission. We’re all smart. Let’s move on.” I used to be
somewhat skeptical of putting your mission statement or values on posters on the wall. It
seemed controlling and vaguely Orwellian—like fascist marketing. But I had it backwards.

Those posters? You find them also in the most freewheeling companies—the companies that
grant the greatest measure of autonomy to their employees. Now whenever I see mission
statements plastered on every wall, stating, “Here’s our goal,” or “Here’s where we’re going.” I
recognize that there can be an unwritten footnote: “Get there however you’d like.”

I’m Reid Hoffman, thank you for listening.

Masters of Scale Episode Transcript: Stacy Brown-Philpot

DELASHEA STRAWDER:​​ The rhythm is ….

REID HOFFMAN: ​That's DeLashea Strawder. She's the Director of Music Programs at the
Mosaic Youth Theatre in Detroit.

STRAWDER​​: And the song is [singing]: Six times six is 36, six times five is 30 even, six
times four is 24, and six times three is 18. Get it. Do the sixes, do the sixes… And so on
and so on.

HOFFMAN: ​And she knows the power of a catchy tune. When teachers need help making a
lesson “sticky,” she goes into the classroom to inject a little music.

STRAWDER​​: We might make songs that help teach multiplication facts. We might do a
rhythm piece that helps young people talk about syllables. Most people learn the
alphabet through the ABC song, so it works.

HOFFMAN: ​It’s true, the ABC song is a stone cold classic. Right up there with “I’m Just a Bill”
and “Three is a Magic Number.” My personal favorite of DeLashea’s is “Do the Sixes.” There’s
just something about the beat.

STRAWDER​​: [singing] Six times six is 36, six times five is 30 even, six times four is 24,
and six times three is 18. Get it. Do the sixes, do the sixes…

HOFFMAN: ​Few of us can resist the power of an earworm – that magical series of notes that
burrows its way into your brain, and bursts out any chance it gets. Like any good jingle,
Delashea’s lessons stick. And not only do they stick, they spread. A few voices in a classroom…

[Strawder continues singing, but is joined other voices.]

HOFFMAN: ​…spill out into the playground. From them, more kids pick up the tune…

[Chorus of voices grows.]

HOFFMAN: ​…until the chorus grows, expands beyond the school gates, and spreads into the
world. Like any good cover band, each individual makes the song their own.

DeLashea knows that the possible interpretations are endless. All she has to do is open kids’
ears, and they’ll keep learning, growing, and singing their songs. And others, in turn, will learn
from them. All those students need is the opportunity to sing. Where the tune leads them is
anyone’s guess.

1
On the face of it, DeLashea’s teaching method is awfully simple: just keep singing. But take a
closer look at what DeLashea has figured out. She doesn’t direct her students to take an
interest in math or science. She doesn’t force them to memorize and she doesn’t even try to
teach them.

She knows if she grabs them with a tune, and lets them sing, they’ll all learn for themselves —
and then teach each other. Because humans are learning machines. All she has to do is hack
their interests with a catchy song.

And I’m hoping every tech evangelist out there just perked up at the word “hack.” Because I
believe we can hack our way toward a more productive workforce by doing something similar.

Just as those students together create a choir of different voices, so is there a workforce —
unbound by geography, formed by a multitude of people, waiting to be tapped. You can call it
"the human cloud." It’s a workforce that can teach itself, learn for itself, and discover its hidden
talents.

And I believe you can harness the power of this human cloud to solve almost any problem — as
long as you keep “human” in the equation.

[THEME MUSIC]

HOFFMAN: ​I’m Reid Hoffman, founder of LinkedIn, investor at Greylock and your host. And I
believe you can harness the power of the human cloud to solve almost any problem — as long
as you keep “human” in the equation.

But before I go farther, let me define my terms… Most of you are familiar with cloud computing.
In fact, you’re so familiar with it that you’ve dropped the formalities. You just call it the good ol’
"cloud." Even if you're hazy on what the cloud is, you almost certainly use it everyday. Every
time you open a Google Doc or use Microsoft Office online, share a file using Dropbox, or share
a photo on Instagram, you’re using the cloud. You’re tapping the distributed power of computers
across the world to store things and get things done.

The human cloud is similar, but instead of tapping the power of distributed computers, you're
tapping into a huge network of people. Like computers in the cloud, they’re out there, waiting to
be assigned a role. TaskRabbit is an example of this. Uber is an example as well.

The human cloud has extraordinary potential. But it’s more complex than a network of
computers. And trickier to harness. Because humans are not robots, they are not a fixed
variable. They’re different from each other. And miraculously, they change over time.

That’s why the true “X factor” in any equation for scale is the human variable — and in particular
the very human capacity for learning and teaching each other.

2
I wanted to talk to Stacy Brown-Philpot about this, because no one I’ve met has thought more
about how you harness the human cloud. Stacy is the CEO of TaskRabbit, the website where
anyone can be hired to complete jobs, ranging from simple to complex.

Stacy is acutely aware of the humans that make up the human cloud — and how to help them
reach their potential. She’s also seen the costs of not doing so. For her, it’s personal.

STACY BROWN-PHILPOT: ​I grew up on the west side of Detroit. It wasn't the best
neighborhood, it wasn't the worst neighborhood, but people looked out for each other. Of
course, later on, things got worse for a lot of people very, very fast, but it was home for
me.

HOFFMAN: ​The Motor City was struggling as the auto industry’s engine faltered and died.
Times were tough. Communities were devastated by unemployment and despair. Stacy got an
unflinching look at this reality from her very first job: the paper route. Stacy shared hers with her
older brother.

BROWN-PHILPOT:​​ We would deliver the papers in the mornings, and then on the
weekends we had to go collect from people. Of course, there was always people who
didn't want to pay, so I had to make sure we got paid.

HOFFMAN:​​ How old were you then?

BROWN-PHILPOT:​​ Oh, I was about 10 years old.

HOFFMAN:​​ How did you get people to pay?

BROWN-PHILPOT​​: Well, you just knock on their door a lot, and often, and then you kind
of watch when people's cars would pull up, and see them going in the house, and you
run out and catch them before they close the door. And then I'm 10, so of course they're
going to look at me and say, "I need to give Stacy her money." But sometimes they just
wouldn't answer the door if they didn't have it, so you have to watch people when they
go into their house.

HOFFMAN: ​Most people would agree that stiffing a 10-year-old girl out of her paper route
money is a jerk move. But Stacy wasn't deterred.

BROWN-PHILPOT:​​ Some people would see us and it's like, four degrees outside, and
they would just give us that extra dollar. That just meant so much, because I know it
came from people who didn't have a whole lot of money, but they were proud of us for
doing real work, good work, legal work, in a community where a lot of people did illegal

3
 work to make money. I think that helped inspire me probably later on, that if you do good
work for good people, it'll pay off.

HOFFMAN: ​But there was a less sentimental reason that drove Stacy to lug heavy bags of
paper through freezing Detroit streets.

BROWN-PHILPOT:​​ I liked to buy candy.

HOFFMAN:​​ I think that's universal amongst 10-year-olds. You start thinking about,
"There's a use for this money. It's called candy."

BROWN-PHILPOT:​​ Exactly.

HOFFMAN: ​Cash equals candy. It’s a fun equation you learn as a kid. But Stacy learned some
tougher lessons too.

BROWN-PHILPOT​​: I would say that my upbringing in Detroit taught me grit. It taught me

about not just the cold weather, but there's a community that needs to thrive, and you
need to figure out a way.

HOFFMAN: ​Stacy found her way from her childhood in Detroit to college at Wharton,
investment banking, and business school at Stanford. With her MBA in hand, she applied for a
job with Google.

BROWN-PHILPOT: ​Thirteen interviews later, I decided that this was probably one of the
best set of people I've ever met in my whole life, and that these are the kind of people I
want to learn from.

HOFFMAN: ​But something was missing. Stacy’s high school had been 98% African-American.
At Stanford and then Google, she found herself part of a vanishingly small minority. Why were
there so few black people in the tech industry? What could be done to tap the huge pool of
talent she knew existed? She took those questions to her then-boss at Google, Sheryl
Sandberg.

BROWN-PHILPOT​​: I said, "Sheryl, I think we need to create a network for black people,
and I really think we should just recruit more, and you've done a lot of stuff with women,"
and she'd already really advocated a lot of things around women, so, "Can you help me
with this?" She said, "No, because I'm not black, and you are the person that needs to
do it." She said, "Stacy, at one point you have to realize that you're the person that we've
been waiting for to make these things happen."'

HOFFMAN: ​True to form, Sheryl Sandberg got Stacy to “lean in.” And Stacy’s initial effort was
decidedly minimalist – a simple email chain.

4
 BROWN-PHILPOT​​: I added all the black people that I knew and I told them to add all the
black people that they knew.

HOFFMAN:​​ This initial move was as low-tech as it gets. But watch how the the power of the
human cloud kicks in. Recipients forwarded the email to their contacts, who in turn forwarded it
on to theirs. The conversation grew.

BROWN-PHILPOT: ​All of a sudden we were a club that then formalized into not just
about recruiting, but we wanted to attract, we wanted to introduce people to the concept
of working in tech, we wanted to retain people, we wanted to build community.

HOFFMAN: ​That club became the Black Googler Network. It pioneered schemes to reach out to
talented black students who otherwise may have missed out on a career in tech. It was one of
Stacy’s first experiments in tapping pools of talent who sit outside the stream of opportunities.

Stacy’s time at Google took an unexpected detour — to India. Part of her job in India was to
make Google's ad platform smarter.

BROWN-PHILPOT:​​ The India team used to approve all the ads that showed up on
Google and it's literally a person that had to go: "Yes, no, yes, no." And finally, we were
teaching the machine to do: "Yes, no, yes, no." But at some point, there's just some
judgment about what's on this page that the machine just can't learn.

HOFFMAN: ​Most people assume that what’s served by Google and other platforms is all
technology, all servers.They don't realize the intensity of the human engine behind it. It was this
human engine Stacy was building in India.

BROWN-PHILPOT:​​ You assume that all automation is possible, and when you're sitting
in Silicon Valley, you have that mindset that everything can and should be automated,
and our entire lives will be more efficient because of it, and that was the moment when
we learned that there has to be some human judgment somewhere in society.
Otherwise, we will make bad decisions.

We talk a lot about technology teaching us how to be smarter, but I still believe that
there's human beings who just teach technology how to be smarter. I think that's an
important concept that we took later to TaskRabbit.

HOFFMAN:​​ She was starting to explore the essential role that human intelligence plays in
artificial intelligence. But her time in India also taught her a more subtle lesson about human
nature.

5
 BROWN-PHILPOT: ​I was stubborn. I had my own way of doing things. I'm a very
organized person and so I would show up at my one-on-ones...

HOFFMAN: ​When Stacy says “one-on-ones,” she’s talking about the one-on-one meetings with
employees who report to her.

BROWN-PHILPOT: ​And I'd have the 10 things that I wanted to accomplish and then I'd
get through the first one and feel frustrated that we didn't get through the nine other
things.

HOFFMAN: ​On one level, Stacy was learning what every thoughtful executive learns when they
work inside another culture: things don’t always work the way you expect them to.

BROWN-PHILPOT:​​ I had that same meeting with the same person the next week and
just get more and more frustrated, but what I needed to learn, faster than I learned at
that time, was that this meeting is not about you, Stacy. This meeting is about the person
that you're leading, and that person needs to talk for 25 minutes in the 30-minute
meeting in order to be effective in their job. Seeing more of what I needed to do to help
others be successful, than what I needed to do to be successful, I had to get hit over the
head with that many, many times before it worked.

HOFFMAN: ​That’s a great lesson.

HOFFMAN: ​The lesson here is more profound than just a cultural exchange. Stacy was learning
something essential about humans and how to get the best out of them: As a manager, your job
isn’t just to direct your employees or drive their To Do list. Your job is turn the light on inside
them.

With her task lists and efficiencies, Stacy had forgotten there was a human in the equation. And
so many managers and organizations still do this today. We unknowingly treat our teams like an
assembly line — units of work to accomplish tasks. We create systems based on efficiency. And
rationality. But humans aren’t always rational or efficient. At least not the way a machine is. And
that’s a good thing.

Unlike actual machines — which have to be coaxed into learning — people will often
spontaneously teach each other, and themselves, if you give them a chance.

A new book zeroes in on just this point. It’s called “Build An A Team” and it’s written by
disruptive innovation expert Whitney Johnson. She’s helped countless founders lean into
learning.

WHITNEY JOHNSON: ​I think we all mean to be a great boss. We mean to be a place

that people love to work. The problem is that this on-the-job development gets lost in the

6
 day-to-day chaos. So then people get bored and stuck, and then they stagnate and
because they're stagnating so does your organization.

HOFFMAN:​​ Of course, no one intends to let their employees stagnate. What happens is that
the better they are, the more you need them to keep doing what they’re doing.

JOHNSON:​​ You want people to stay. You want them to stay right where they're going to
do you the most good, but if you're going to have an organization where learning is
taking place and engagement's taking place, and you're avoiding getting disrupted,
recognize that you and every person on your team is a learning machine. You want the
challenge of not knowing how to do something, then learning how to do it and mastering
it, and then learning something new. Basically, you, me, everyone, we want to learn and
leap and then repeat.

HOFFMAN: ​Learn. Leap. Repeat. It’s a formula for innovative companies and satisfied
employees. As we’ll soon see, it’s also the formula for the human cloud. But that’s getting ahead
of our story.

Stacy just returned from her tour of duty in India — turning over these new ideas about
motivating and maximizing human behavior. She came back to Google HQ. Back to the
confining familiarity of her executive suite.

BROWN-PHILPOT:​​ I looked around and I was in an office, two floor-to-ceiling windows.

My dog at the time was there, had his own bed. I had a table. I had a couch. I had an
assistant. I had everything that most people dream of in a corporate job, and I felt like my
work wasn't done. I said, "I got to go to do something else that grabs at my heart in a
way that is going to allow me to accomplish more."

HOFFMAN: ​As luck would have it. She met Leah Busque. Leah was the founder of TaskRabbit.
And she was searching for a new Chief Operating Officer. Stacy had tried the service out and
loved it. In 2013, she joined TaskRabbit.

BROWN-PHILPOT:​​ I'm a mission-minded person. We talk a lot in Silicon Valley about

missionaries and mercenaries, and I'm definitely in the missionary bucket. Google's
mission to organize the world's information was... Wow, that's huge. I could do that for
the rest of my life.

But TaskRabbit's mission around revolutionizing everyday work really grabbed me, and it
brought me back home to Detroit. It brought me back to the people who were good,
hard-working people who lost their jobs because of the failure of an entire industry, who
couldn't find work but had strong work ethics, and here's this great little app that is doing
that.

7
HOFFMAN: ​When Stacy joined TaskRabbit, it was a website and app where anyone can hire —
and be hired — to take on simple and not-so-simple tasks.

BROWN-PHILPOT:​​ TaskRabbit was eBay for services when I joined. Anybody can do
anything, get anything that they want.

HOFFMAN: ​And what did they want? Let us count the ways.

There are the obvious tasks: scrubbing grime off the stove so you can get your security deposit
back. Helping move that ugly, heavy dresser out of sight into a spare room.

But use your imagination for a moment. Because your imagination is the only limiting factor
here. How about:

● Washing a prize show piglet.

● Helping a jilted lover win their sweetheart back
● Steam cleaning Weird Al Yankovic's stage outfits.

No, I'm not making any of those up. They have all appeared on TaskRabbit, and they’ve all
been completed by “Taskers,” as their freelance, all-purpose workers are affectionately known. I
couldn't resist asking Stacy about the strangest task she's seen a Tasker be tasked with.

BROWN-PHILPOT:​​ It was the "Impersonate my best friend at the birthday party." This
got coverage in L.A. on TV, and it's no shock it's like L.A., right?

HOFFMAN: ​No, you didn’t mis-hear that. A tasker was hired to attend a birthday party, and
convincingly impersonate the guest of honor's best friend. We tracked down that Tasker. Her
name’s DaVette See.

DAVETTE SEE:​​ So, I guess my most famous task, the one most people know about, is
the time I was hired to impersonate someone at their friend's birthday party. That was
pretty crazy.

So Riss hired me to go to Holly's birthday party as Riss. Because Riss couldn't make it,
that was Riss' answer was to send somebody as her, as Riss. I mean, there was no
hesitance on my part, I once I read it I was like, "This was custom made for me.” We
didn't look anything like alike. There's like 20 year gap in age, there's race difference, I'm
black, she's not.

So, there was another friend and she was going to be the one who called me by Riss'
name when I walked in. The friend announced, it's like, "Oh, Riss, I'm so glad you could
make it." And I said, "Yeah, surprise." And then there was just this moment of shock and

8
 then there was just laughter because it was just the kind of thing Riss would do
apparently.

HOFFMAN:​​ Taskrabbit sounded like a blast right? For clients, it was like having a digital genie
in your cell phone who could make all your wishes come true. For Taskers like DaVette, it meant
every day was an adventure.

But the free-wheeling system had severe limitations. Taskers had to go through this bidding
process for every task. Many found themselves in a race-to-the-bottom to offer the cheapest
prices.

CLIENT VOICE:​​ Alright everyone, I got this prize piglet here that needs some serious
washing. Now, he’s pretty squirmy, very dirty, and he doesn't like strangers very much.
Oh, and you're gonna have to catch him yourself.

TASKER 1:​​ I'll do it for $20!

TASKER 2:​​ Pass that porker to me – I’ll clean him for $15!

TASKER 3:​​ I'll do it for !10. I'll even dress him in one of Weird Al's shirts, left over from
my last job. No extra charge!

HOFFMAN:​​ This bidding system — which could be such a source of excitement for some, was
exhausting to others. It took too much time to go through all those bids and choose a winner.
And the open-ended, “anything goes” framework set many clients up for disappointment.

BROWN-PHILPOT:​​ Fifty percent of the people had a bad experience, and they told 10
times more people than the people who had a good experience. That just wasn't going to
work for the long term.

HOFFMAN: ​A 50/50 chance that each of your new customers will have a bad experience? You
don't need to be a master mathematician or a master of scale to know that's bad news. To fix
the system, Stacy and her team would need to re-think how TaskRabbit worked. They came up
with a plan.

The types of tasks people could offer were narrowed to four categories: handyman work, home
cleaning, moving help, and personal assistant. Taskers could set when, and where, and how
they wanted to work. They could specify their hourly rates. No one could charge below a
minimum rate. And they would no longer would they have to anxiously check their phones in
case they were outbid on a potential task.

9
As for Clients, they would be able to book a Tasker in a single visit to the site or app. No more
scrolling through long lists of bids. Instead, Clients would be presented with a shortlist of
recommended Taskers based on their rates, reviews, and skills.

Stacy and her team wanted to test the new system in virgin territory. Some place people had not
used TaskRabbit before. This way, reaction to the new system would be untarnished.

BROWN-PHILPOT:​​ We tested it in London because they don't know what TaskRabbit is

and how it works. They've heard of it, and lots of people were in London and wanted
TaskRabbit to be there, but they didn't know what the product was.

HOFFMAN: ​The Brits loved it.

BROWN-PHILPOT:​​ The assignment rate went up, our close rate went up to over 80%,
not 50% anymore. We knew that we were on to something, and then we brought it back
to the U.S.

HOFFMAN: ​If the Brits loved it, then the Americans would immediately take to it, right? Well, not
exactly. Changing an existing system is never as simple as introducing a new one. And for
Taskers in the U.S., the changes went down like a warm beer on a rainy London afternoon. The
problem wasn’t necessarily the change itself, but how they heard about it.

BROWN-PHILPOT:​​ We told them the same day that we told TechCrunch and USA
Today and all of our clients, everybody, and that was a mistake because they revolted,
and they were upset, mostly because we didn't tell them that we were going to do this,
some because some people weren't going to have work anymore, and they were going
to have work in a different way.

HOFFMAN: ​What happened to Stacy is a classic mistake. One that many of you listening have
probably also made. And if you haven’t — listen closely. It could save you some serious pain.

Stacy had implemented an objectively positive program at TaskRabbit — one that she knew
would change the Taskers lives for the better, and make her customers more happy too. But
she forgot to tell them about it. And by letting them learn about the news in the press, she
undermined their sense of investment. TaskRabbit isn’t just a company, it’s a community, where
people feel a sense of ownership. And when people feel ownership, they expect to have input…
or at least learn about the news before they read it online.

And this isn’t just true of online communities. With all products and services, there's a spectrum
between “I'm a consumer” and “I'm an owner.”

If you’re selling toilet paper, your customers are on the consumer end of that spectrum. Sure,
they use your product everyday. But they’re not super invested in your cult of personal hygiene.

10
But the more users feel their identities and economics are invested in your product, then you are
no longer the sole proprietor. Your users are owners too. They may not hold equity or have a
parking space in your office lot. But they are part owners in the brand, and that's always the
case whether you’re a community or a network or a marketplace.

The reaction of the Taskers had blindsided Stacy and her team. They had forgotten the very
human connection they had to this workforce. But there was another issue. One they had
predicted. And it was made worse by the ongoing user revolt.

BROWN-PHILPOT:​​ We knew that we were going to lose money the day after we made
this decision. We didn't know for how long before the recovery would happen. For the
period where we think that we are going to be in this slump before we recover, we're
going to have to all be okay, as a leadership team, that this is happening, and nobody
can fake. Nobody.

HOFFMAN: ​There could be no retreat. Now Stacy and her team were in a foxhole. And they
had to hold position. With artillery shells whistling over their heads. The ground shaking beneath
their feet. Casualties mounting. But they had to hold their nerve until the offensive passed, or
they stood to lose everything.

At first, they lost revenue and users. The wide-ranging changes had put off many people, both
Taskers and Clients. The narrowing of the task categories also caused a downturn in business.
But over time, the new system yielded happier users. Eventually, the turnaround worked.

BROWN-PHILPOT:​​ I'm really glad that we stuck to our guns, but it took a lot of courage
for us to do that, and the lesson there is, you've got to have a plan if things don't work
out, but you've got to be willing to stick to the plan, because sometimes it will, and most
times it will.

HOFFMAN: ​The tough transition was behind them. And now something really interesting was
happening. Having eliminated the most competitive aspects of the Taskrabbit system — where
taskers had literally been bidding against each other — something curious happened.

TASKER:​​ Hey guys, Tim here. Today I’m going to teach how to unclog drain.

TASKER: ​Hey, I’m Jess. And this is how you hang a picture frame.

TASKER: ​Here’s how you install a light fixture.

HOFFMAN: ​Taskers started teaching each other. They started holding classes and posting
videos to teach each other skills and increase each other’s earning power. It’s a stunning
example of what happens when you allow a human cloud to be human. It might start
spontaneously and continuously improving itself.

11
 BROWN-PHILPOT:​​ The community of Taskers, they really take pride in the work that
they do. Everybody seeks to get better at something. I might be naïve in saying that, but
all of us seek to get better at something.

HOFFMAN: ​Particularly enterprising Taskers sought out and identified new customer needs.
They then developed new skills to address them, and shared these with the community. It
became a self-reinforcing loop that everyone benefited from.

BROWN-PHILPOT:​​ We've actually harnessed the power of the community to do a lot of

the training and development. If I want to learn how to drill a hole in a brick wall, I can
charge $5 more per hour, and so someone organizes a virtual session or a live session, I
can go to that.

HOFFMAN: ​Drilling is just the beginning.

BROWN-PHILPOT:​​ Drill holes into brick walls, how to mount a TV with the wires hidden,
trampolines, Christmas toys. In fact, I got one, which is like a little car, for my kids, and
they'll teach each other about the tricks and tips on how to do that. As you can imagine,
there are extremely good Ikea furniture assemblers on TaskRabbit who can put things
together in like 20 minutes that would take two hours.

HOFFMAN:​​ What happened was that once the hyper-competitive bidding structure was
removed, a supportive community of Taskers emerged. They teach each other skills. Increase
one another’s earning power.

In a narrow, self-interested sense, this doesn’t exactly make sense. In theory, taskers were still
in competition with each other for jobs. But this is exactly this kind of wonderful expansion that
you find in the human cloud. It’s what happens when you keep humans in the equation. They
find a way to positive sum games. Where one plus one isn’t two, but maybe is four or five.
Because as they help each other, it becomes a dynamic, evolving positive sum system that
helps everyone a lot more. The pie grows.

BROWN-PHILPOT:​​ I remember there was a Tasker who came to my house to fix a light
switch recently, and he said, "You know, I remember you," and I thought he was going to
remember me as the CEO of the company, but he had delivered a birthday cake and
flowers for me like two years before to a restaurant. And I said, "How did you go from
delivering cake to light electrical work?" He said, "Because of the TaskRabbit
community. I've always been interested in fidgeting with things. I've gone to some
classes, I learned, and now I'm making like twice as much as I was making on the
platform because of TaskRabbit."

12
 You can't quantify the impact of what that is, and the power of community, but it's really
helped, we've created this self-enabling way for people to learn and earn in the
marketplace.

HOFFMAN:​​ For me, this is the most exciting aspect of the human cloud – if you give it the
space, it will teach itself, develop new skill sets and help keep the workforce adaptive. It’s a
powerful self-reinforcing loop, similar to ones we’ve seen in other sectors. I was thinking aloud
about this the other day:

HOFFMAN:​​ And I've thought a lot about recursive loops relative to people as part of the
social network loop. You know, the LinkedIn loop, the Facebook loop. The benefit of
loops is they compound. So the simplest loop that's described a lot is the virality loop: I
send out two invitations and one of them is answered and that person sends out another
2.1 invitations. Then you have an exponential curve up and you can get to massive
numbers very quickly.

So then you go, "Okay, when you're tieing human factors and human decision into the
loop, even though the time coefficient is slower, the impact of adapting a human
network, a human cloud, may be so fundamentally important. Because it's changing
economic potentiality, because the real key question is: how do we use technology to
enable many more middle class jobs." It’s one of the things I've been thinking intensely
about.

HOFFMAN: ​Stacy is thinking intensely about how to encourage more self-reinforcing loops, and
more great talent pools.

BROWN-PHILPOT:​​ A lot of what we're trying to do with the future of work is make it very
easy for people to access work opportunities. Inside of TaskRabbit, what about the app
experience can we do to make it so that someone who doesn't have a high school
education or a college degree can easily download this app, enter in some information
about themselves and be ready to accept and decline work? So we're spending a lot of
time thinking about: how do we make this technology simpler? How do we make
TaskRabbit more accessible to more people and more affordable?

It used to be that at our current hourly rates, my mom would not have been able to use
TaskRabbit because she just would have looked at that and said, "This is too expensive,
and I'd rather just do it myself and sleep less, or fall asleep while I'm helping you with
your homework,” which happened, “because I can't afford this service."

HOFFMAN: ​My conversation with Stacy really got me thinking about this human
micro-entrepreneur loop — and what kinds of companies, and tools, and data might amplify it.
The creation of good and fulfilling middle class jobs is one of the most important goals we can
collectively focus on.

13
Because when people feel more safe and secure in their economics, they feel there's a good
future in front of them. And they tend to be more open hearted. They tend to be more
permissive. They tend to say things like "Hey! We welcome immigrants! Hey! We should do
things for other people's children, not just our own!"

And that’s the kind of future I can get behind.

I'm Reid Hoffman. Thank you for listening.

14
Masters of Scale Episode Transcript: Stewart Butterfield

REID HOFFMAN​: It’s 2002—dark days in Silicon Valley. The dot-com bubble had burst. Tech
investors were quiet. Almost nothing of note was launching online. And then out of nowhere
came an experimental video game called Game Neverending—a role-playing game that was all
about social interaction. You work with other players online to create a world. You build
buildings, houses, and other objects. For the gaming nerds out there, it was kind of a precursor
to Minecraft. You could pool your resources with friends to build structures, invent new objects,
and reach higher levels together. Your objective? Just keep building; don’t stop. There was no
way to ​win​ this game—hence the title, Game Neverending—but a goal that most hard-core fans
aspired to was to build the final item of the game: a Game Neverending. So meta!

It was an offbeat, self-aware game that didn’t take itself too seriously. The prototype had a great
cult following, with thousands of users who loved it. But—

STEWART BUTTERFIELD​: But we couldn't raise any money for that.

HOFFMAN​: That’s Stewart Butterfield. You might know him as the founder of Slack. But before
that, he created this daring new game—​just​ at the wrong time. As I said, it was 2002—the
dot-com bubble had just burst—dark days in Silicon Valley. And tech investors weren’t thinking
about gaming as an online experience yet.

BUTTERFIELD​: So it was a really black and bleak-looking point in the history of financial
markets generally, but anything as frivolous as a game is just not going to get funded.

We got to the point where the only person on the team who got paid was the one person
on the team who had kids, at that point. And we needed some kind of "Hail Mary."

HOFFMAN​: Ludicorp was running out of money. The company was failing. Having no idea what
the next step was, or what to tell his team, Stewart needed to stall. So he and his co-founder
Caterina Fake got on a plane to New York to attend a video game conference. But before the
plane landed, things got even worse.

BUTTERFIELD​: And this sounds almost made up. But on the way, I got food poisoning
on the plane, puking on the Van Wyck on the way into New York, arriving at the hotel.
Just being sick all night—it's like 3:00 or 4:00 in the morning—trying to keep anything
down, like ginger ale or water. And the whole idea for Flickr came to me.

HOFFMAN​: Flickr—one of the most successful photo-sharing sites of all time, an idea that
forever changed the way we interact with photos online. You could argue it changed the way
that we interact online, period. And the idea hits him while he’s crouched over a toilet in a hotel
with food poisoning—Silicon Valley lore at its best.
But at that moment, Flickr wasn’t exactly a game-changing vision of the future. It was a way out
of the mess his company was in.

BUTTERFIELD​: It wasn't coming from a grand vision of what photos could be, All that
stuff came later. There was no insight, it was just like, “Can we not go out of business?”

HOFFMAN​: “​Can we not go out of business​?” These are the words that launched a thousand
pivots. In Stewart’s case, it opened his eyes to a service that would do far more than change his
online game—it would change the way we interact with photos forever. It would pave the way
for Facebook, Pinterest, Instagram.

The idea had instant resonance. It caught fire with users. It got attention from investors.
The only problem? He still had this whole gaming company still operating. What do you do with
an idea that isn’t working? You kill it.

I believe the moment you find the thing that your users cannot stop doing, you need to slash
and burn the rest of your business.

[Theme Music]

HOFFMAN​: This is Masters of Scale. I’m Reid Hoffman, co-founder of LinkedIn, partner at
Greylock, and your host. I believe that the moment you find the thing that your users cannot
stop doing, you need to slash and burn the rest of your business.

In Silicon Valley, entrepreneurs tend to celebrate this kind of daring pivot. They see an
opportunity. They act—and they don’t look back. Later on, they sound a bit like Caesar reporting
to the Roman Senate: “I came, I saw, I conquered.” But the truth is a lot messier.

There’s more to a pivot than a sharp left turn. First, there’s the opportunity you’re pivoting
toward. ​Can you see it clearly enough to navigate toward it? Can you convince others to come
along?

Then you have to pivot ​away​ from your old idea. This can be incredibly difficult, because it
involves humans. And humans don’t tend to let go of old ideas easily. You risk blowback from
your co-founders, your staff, your investors and your users.

This will likely be be the single greatest test of your leadership skills, because your credibility will
come under scrutiny. Are you even believable anymore?

I wanted to talk to Stewart Butterfield about this theory, because he pulled off two uncanny
pivots. He has twice​ ​launched game companies, only to pivot toward game-changing
communication platforms: first, as the co-founder of Flickr, the pioneer in photo-sharing, and
second, as the co-founder and CEO of Slack—a platform for group communication within teams
that has taken off in Silicon Valley and beyond. Both companies, believe it or not, started as
online video games.

And at first, this might seem like a real leap. But when you learn a bit about Stewart, it starts to
make a lot more sense. For one thing, Stewart likes video games. But he doesn’t like-like them.

BUTTERFIELD​: I like playing games, but I wouldn't classify myself as a gamer. I don’t
own a console. I definitely have played my fair share of Civilization, and there are stupid
iPhone games that I’m embarrassed to say that I enjoy.

HOFFMAN: ​He loves board games and card games—old-fashioned games that bring people
together. And he wanted to bring that same sense of a communal experience to video games.
And one thing you should know about Stewart: He has a ​lot​ of experience with communal
experiences.

Let me start at the beginning.

Stewart grew up in a quirky Canadian fishing village called Lund. Drive north along Canada’s
Highway 101, as far as the road will take you, and you’ll arrive. There’s a welcome sign at the
entrance to the town that reads, “Lund, the end of Highway 101. It also reads, “Lund, the start of
Highway 101.” That’s your first clue that the residents of Lund are an open-minded bunch.

Lund was settled primarily by American hippies in the 1960’s—and that’s where Stewart
Butterfield was born. His birth name was Dharma. He changed it to Stewart at age 12. As far as
I can tell, Stewart has taken to the capitalist lifestyle swimmingly. But I had to ask him about
those formative years.

HOFFMAN​: So you lived with your parents in a log cabin that had no running water for a
few years. Did this shape you as an entrepreneur?

BUTTERFIELD​: I'd like to say that some of that "no running water, no electricity" rubbed
off in me in an Abe Lincoln kind of way. But I don't know if that's actually true.

HOFFMAN​: So he might not be an Abe Lincoln. But those years in the cabin gave him a
particular lens on the world. It shaped, among other things, how he thinks about games, and
their ability to bring people together.

BUTTERFIELD​: My dad loved to play bridge, and he didn't like playing bridge against
the computer—there was just nothing there. He also wouldn't have invited the same
three people over to his house just to hang out and do nothing. But inviting them over to
play bridge, and there was this magic. It's exercising a part of your brain which is fun to
exercise, but there's also camaraderie, and there's trash talking, and there's a good
amount of competition.
HOFFMAN​: So when Stewart thinks about games, he’s thinking about something much bigger
and more essential.

BUTTERFIELD​: it's not games that are so interesting to me, it's play as an excuse to
interact with people socially.

HOFFMAN​: And this is the right way to think about Stewart’s first venture—Game Neverending.
It was, at its essence, an excuse to interact with people socially. But it had some fatal flaws,
among them: bad timing.

BUTTERFIELD​: We were never going to raise money for the game. I had tried
everything. I had put all of my savings into it, we had tapped out friends and family. We
had more or less worked through all of the very small amount of angel investment we
were able to get.

HOFFMAN​: Stewart’s failing game needed a lifeline, and that’s typically the moment just before
the pivot. There are some examples of peacetime pivots driven entirely by opportunity. But
that’s not typical. Pivots almost always spring from failure. It was the failure of Game
Neverending that forced Stewart to think about what would come next.

And his moment of revelation—over a hotel toilet in New York City—gave him the idea for Flickr,
the photo-sharing site. But the idea didn’t come to him fully formed: it started out hazy, as many
pivots do. The initial idea incorporated photo-sharing into the game itself.

BUTTERFIELD​: We had this game interface. In the game, you had an inventory, you
could pick up objects. We made that inventory a shoebox full of photos. And you could
do interesting things, like drag photos around on to group conversations, and they would
pop up on the other person's screen. You could annotate them in real time. And there
was chatting in the game, so you could talk to the fellow players—that became a
cornerstone of Flickr.

Here's the twist, though—that was the first idea for Flickr, which was actually really a
terrible idea that had a lot of technological innovation, and so it wowed a lot of people,
but it wasn't a very useful product.

HOFFMAN​: Flickr may not have been entirely useful—nor fully formed—when the idea first
came to him. But the idea of sharing photos had immediate traction.

BUTTERFIELD​: Maybe three months in, it was pretty obvious that Flickr had legs. So
people started to use it, people were talking about it, it got a lot of good press.
HOFFMAN​: For Stewart, Flickr was a sort of homecoming to his deep-seated interest in just
hanging out. And that’s great for Stewart—but what about the rest of his team? They had signed
up to build Game Neverending, and that kind of pivot can be brutal. I asked Stewart how they
took the news that they were no longer a gaming company.

HOFFMAN​: What was that turn like?

BUTTERFIELD​: It was rough. And there was definitely differing opinions. There was a
lot of arguments about what we should be doing. And for a time, we were working both
on a game and on Flickr. The team was still really split, so we had a vote. And I
remember this really distinctly, because I had to do some backroom politicking. After the
first vote ended, it was a tie game. So I called up one of my co-founders, who was in
New York, and had to do some horse trading. I felt like I was a senator.

HOFFMAN​: When your team is split, it might seem smart to hedge your bets and pursue both
ideas at once. It may seem to keep the peace with your team. But as a founder, you never want
to say “We’re working on X, and we’re also working on Y—because my team likes both ideas.”
That may be the expedient solution. But I can tell you how that story ends: like Thelma and
Louise, holding hands and driving over a cliff together.

You actually owe it to your team to force a decision—X or Y, choose one. It’s ultimately the
founder’s responsibility to make that call. But you have to bring your team along. This is the
situation Stewart found himself in.

He almost had the votes he needed, but there was one hold out.

BUTTERFIELD​: Well, I mentioned earlier that there was one person on the team who
had kids that was continuing to get paid—that was him.

HOFFMAN​: And this happened to be one of his co-founders at Ludicorp. Everyone else was
willing to work without pay, but he had a family to provide for—mouths to feed, soccer camp to
pay for. And this was the holdout vote that Stewart needed to stop working on the game, and
fully focus on Flickr.

BUTTERFIELD​: So it was a bit of a more, "Let's play this out a couple of months, and
see. If you'd like to continue to get paid, there's only one way we're going to do this.” And
I didn't mean that to be threatening at all, it just—we were never going to raise money for
the game.

HOFFMAN​: Hold on. Rewind.

BUTTERFIELD​: “If you'd like to continue to get paid, there's only one way we're going to
do this.”
HOFFMAN​: Did Stewart just threaten that guy’s paycheck? Not exactly. You have to understand
that Stewart had the kind of trusted relationship with his co-founder where this was permitted.

Working for a startup is kind of like going to war together. When you’re crouched in the bunker
with the rest of your platoon, you form massive trust. If I’ve seen you look out for me, I’m going
to look out for you.

So Stewart’s campaigning was pragmatic, rather than antagonistic. He’s saying “Look, we all
love working on the game. But the reality is that there won’t be any money left if we keep doing
this.” His co-founder heard him and got on board.

BUTTERFIELD​: We had another vote the next day, and this time the Flickr side won. At
that point, I think we had less to lose and there was less invested. It wasn't as traumatic
as the next big pivot, which was Glitch to Slack—that was seven years later.

HOFFMAN​: And we will come to that.

HOFFMAN​: Indeed, we will come to that. And you Slack fans may be eager for me to pivot. But
this transition from Game Neverending to Flickr is just such a perfect example of an extreme
pivot—I had to test a few more theories.

I believe that, as CEO, you always have to bring the core team along during a pivot. You have
to make them feel like it was a joint decision. It doesn’t have to be completely democratic; in
fact, it shouldn’t be democratic. But it has to ​feel​ democratic. People have to feel they have a
voice. And as Stewart campaigned, he was essentially hacking the quasi-democracy, saying
“Yes, your vote counts. But I can persuade you, because I have your interests at heart.”

Finally, the team could focus on Flickr, and slash and burn the rest. But what about your users?

BUTTERFIELD​: There's an easy part, which was we all liked each other, and we all
liked making software, and it's fun to make software, so we can just continue doing that.
The hard part was just the psychology of sunk costs. We had written a whole bunch of
great material, we had created this whole world, we had spent many thousands of hours
convincing people to come play it.

We had built up this community, they were very enthusiastic. And every death of an
online community is its own kind of tragedy, because those people think they will be able
to maintain those relationships, but if the community is gone, they often aren't.

That's really the hard part, and that's the part that is difficult for people to get over—even
at the point where it was apparent that continuing wouldn't ever result in something that
was going to be economically viable, or even sustainable.
HOFFMAN​: Game Neverending was never going to be successful. But a lot of people really
loved it. And when the game died, the community died with it. To those players—those
people—that was a tragedy. What’s most important to humans is their tribal membership, their
relationships. And all of the sudden, there’s a pivot riding into town and saying “Hey, by the way,
I know you’re all really happy being neighbors—but we’re shutting down the town.”

So Stewart and his co-founders have navigated what was in many ways a prototypical pivot.
They’re going down a path, which was getting narrower and rougher, and seemingly leading
nowhere. They see a different path leading to a better place, and they pivot toward it. They lead
a team through a difficult organizational transition; they weather a storm from existing
customers.

It might seem like the most harrowing transition was behind them. But keep in mind Stewart
wasn’t just suggesting a hairpin turn for his team. He was suggesting a hairpin turn for the
Internet.

BUTTERFIELD​: Almost all the photo sharing at that time was entirely centered around
printing, and that was the idea of what people wanted to do with their general
photographs.

So that in one sense made it very easy. There was a lot of competition at the
time—there was Snapfish, Shutterfly, there was Ofoto, which Kodak had bought, and
Kodak had put a lot of muscle behind it.

And none of them thought of the Internet, as far as I could tell, as a social medium in
itself, and a worthwhile place to put photos.

HOFFMAN​: With Flickr, the sharing itself became the primary goal—not a print, or a mug. And if
this concept seems awfully familiar, it’s because Flickr laid the foundation for everything we do
today on Facebook, Instagram, and Twitter: tagging, sharing, following, memes. It was arguably
the first comprehensive experiment in modern social media—a testbed for innovations.

BUTTERFIELD​: Gradually, over time, we layered on the photos having titles, and
descriptions. People could comment on them. Joshua Schachter from Delicious
convinced me that tagging photos would be a good idea, and so we added tags.

And soon, we had a place where people could really play with them. I remember the very
first tag for what just happened—someone posted a photo of a street lamp in the dark,
and it was glowing in the mist. And they tagged it "glow project," and they said, "Hey,
other people, why don't you upload things that are glowing and tag it with 'glow project?'"
And that was something that, as far as I could tell, had never happened on the Internet
before—that invitation for joint creative exploration based on tags.
HOFFMAN​: So if you’ve ever taken a “#selfie” or used “#foodporn,” now you know: It started
here, with the glow project.

Flickr changed the paradigm of social interaction online. It succeeded because they had the
right idea at the right time, and they made the right bets. But they also had another secret
weapon: Good old fashioned manners. They knew that for Flickr to succeed as an online
community, it had to be a community—period.

BUTTERFIELD​: I think one of the strengths of Flickr was a really unique culture, and a
huge amount of effort went into setting that. So Caterina Fake, one of the founders of
Flickr, and my ex, she greeted every single user individually. There's another designer
on our team, a woman named George Oates, same thing.

And so I think a lot of what made Flickr great in the end came from that germ of a really
strong and positive community.

HOFFMAN​: We’ll hear more about building a strong community later this season—from
Caterina, Stewart’s Co-Founder, who was equally fundamental to Flickr’s success.

The Flickr community scaled fast. And in 2005, Stewart and his co-founders sold Flickr to
Yahoo.

BUTTERFIELD​: It all happened so fast. We launched in February 2004, and by March

2005, the acquisition by Yahoo! had closed. Basically a year in market, and maybe
10-and-a-half months before we were in the middle of negotiations.

HOFFMAN​: In 2008, Stewart left Yahoo. As an aside, he wrote an epic—and rather

confusing—resignation letter to his boss at the time, Brad Garlinghouse. It’s odd and wonderful.
Look for it.

Now, Stewart had money, connections, and a track record. He decided to launch a new project.
You’ll never guess what it was—yes, another online social game. This one was called Glitch.

BUTTERFIELD​: The idea was pretty much the same as Game Neverending, except that
the technology was much better, so people could be much more creative and you’d be
higher fidelity.

A game world with no combat, very absurdist—probably too high-brow, and too
intellectual—Dr. Seuss meets Monty Python meets Borges. [Laughs] Already you can
tell that in an era where Farmville was just beginning to take off, this was not an easy sell
to America's casual gamers.
HOFFMAN​: In retrospect, perhaps not an easy sell. But at the time, they were sure this game
would be different. This game would be huge.

BUTTERFIELD​: From our perspective, now we have some money, so that makes it
easier; now we have connections. But also, computer hardware got, I don't know,
100-fold better in those seven-or-eight years.

But now—now being 2008—there were tens of millions of people online in the US, and it
became a real hotbed. It wasn't something that seemed strange, it was something that
seemed really natural. Computers were also faster. There's all these new open-source
technologies that we could take advantage of. We were more experienced and capable
as engineers and designers. So the thought was, "Oh, we can't fail this time." There's
just no way, with all of these 10Xs that combine to make it 1,000 or 10,000 times easier
for us. It would be impossible to fail.

HOFFMAN​: That's usually the Ozymandian warning—that thought.

HOFFMAN​: So it seemed like the Glitch team had everything they needed to succeed, and the
stakes were higher this time. Game Neverending had a small scrappy team with no money.
Glitch had dozens of employees and over $17 million dollars in funding. It just ​had t​ o work.

BUTTERFIELD​: There were close to four years of development that went into it, and the
first year was great. It's kind of nice to make software when you don't have any
users—of course, I would much rather have many people using whatever I'm working
on.

But if there are none, whew, it's easy, and it’s fast, and we're developing all this cool
server technology.—stuff that's just intellectually fun, even if it doesn't actually turn into a
product.

HOFFMAN​: Stewart and his team were in deep—four years of development, 45 employees,
tens of thousands of players, $17-and-a-half million dollars raised. Glitch had a small,
committed fan base. But it was failing.

BUTTERFIELD​: At this point, I’ve learned that this is not going to be a commercially
viable creation.

It was incredibly powerful for the small minority of people for whom it worked. So they
spent 20 hours a week playing, and they were very committed, it was a super-tight
community. But most people, like 97% percent who signed up, would be out of there
within five minutes.
 The thing that killed it was just leaky bucket—I mean, just like very classic, you can put it
into Excel in five minutes, and see that this is not going to work.

HOFFMAN​: Glitch was losing money fast. For the second time in his career, Stewart needed a
lifeline. With the benefit of hindsight, we know now how the story ends. And it would be easy for
him to rewrite history, and make the line from Glitch to Slack a straight one. To his credit, he
doesn’t. Stewart is brutally honest about the desperate attempts to find their way.

BUTTERFIELD​: The last 18 months were just a series of experiments in like, what if we
did this, what if we tried that? Maybe it's just missing this feature. We were pretty good at
getting people's attention, because we had more of a reputation, we were more
connected, so we could get lots of articles written about us.

It did always seem like the next thing was going to be what saved it. And by the end, I
actually think it was a much, much better and interesting product than it was when we
first launched it to the world, and maybe if we'd gotten there—

Something that just didn’t work.

HOFFMAN​: You can hear in Stewart’s voice: he still asks himself whether he could have saved
it. And these questions form the inner dialogue of most entrepreneurs in the thick of a transition.

Later on, successful entrepreneurs often tell the story of the ​one​ daring pivot. They leave out the
fumbles and false starts along the way. The truth is, most entrepreneurs pivot many times
before they find their footing. Sometimes you find your way cleanly to success. And sometimes,
you don’t.

BUTTERFIELD​: There was this night where I just lost faith. I just realized, OK, I had tried
the 15 stack-ranked best ideas we could possibly come up with to turn this around, and I
don't think the 16th was going to work if the first 15 didn't.

HOFFMAN​: Stewart was facing a brutal moment of truth: He ran out of options even before he
ran out of money. And he had the maturity to recognize it. What I tell entrepreneurs as they
begin their pivots: stack rank your proposed solutions, from the most promising to the least.
Start with your best few ideas. If they work, great. If not, move on to the next-best ideas. But
often you’ll find your next few ideas are substantially worse than your earlier ideas. And that’s
when you should say, “OK, I’m even less confident in these ideas. And that means I’m heading
off a cliff.”

Part of being an experienced entrepreneur is realizing, “I have to do something ​different.​ I close

the company down, or generate a whole new class of ideas.” In short, get on with the next thing.
You never want to pivot from a bad bet to a worse one.
Stewart knew what the numbers were telling him. For the second time in his life, he would have
to close up shop on a product and team he loved.

BUTTERFIELD​: Man, it is so hard—because the job of a CEO is often just to come up

with a story that enough people believe that you can make something happen in the
world. You have to convince investors, and you have to convince the press, and you
have to convince potential employees, and you have to convince customers. And I had
done a lot of convincing of people, a lot of convincing of people to come work on this
project, to leave whatever thing they were working on before, quit their job, get paid
poorly in exchange for equity in something that just didn't work.

HOFFMAN​: Stewart pulled the plug on Glitch before the money ran out. But he found a series of
graceful exits.

BUTTERFIELD​: And that was a tough conversation with our board and our investors,
because they actually wanted us to keep going. It was a tough conversation with the
other co-founders, who also wanted to keep going.

We had those conversations, and then we called an all-hands. And I walk into the
room—and it was an unusual all-hands; we hadn't announced it before, so there was
already some nervousness in the room. And I stand up, and start, and I didn't even get
to the first sentence and I was starting to cry. I locked eyes with one employee, who just
three months ago had moved to Vancouver to come work with us.

He had moved away from where his in-laws lived, and his in-laws helped take care of
his—I think at the time 18-month-old, or two-year-old daughter—bought a house, and
now I was telling him they didn't have a job any more.

HOFFMAN​: That employee he locked eyes with? That was Tim Lefler, one of the engineers at
Glitch. We asked Tim how he remembered that moment.

TIM LEFLER​: Stewart came in, and had a very somber look on his face. He had puffy
eyes; he looked tired. And we thought it didn’t look great, but it was Monday morning, so
who knows? And he came in, and the very first thing he said to us was, “It’s over,” and
that we were shutting the game down.

And a lot of us obviously knew what that meant. We were not going to be working there
any longer.

HOFFMAN​: One of the things I admire in this story isn’t just that Stewart took responsibility; he
also took action.
 LEFLER​: Stewart and some of the web developers decided to build a page on
Glitch.com.

BUTTERFIELD​: We made a website called Hire A Genius, and we put everyone's

LinkedIn up there, and everyone's portfolio, and everyone's photo,

LEFLER​: And the timing of everything was very deliberate, so that when all of the news
agencies received the press release, ​t​here was always this bit of information that would
be sent out saying, “And these people are looking for work, and here you go.”

BUTTERFIELD​: And we worked on writing reference letters and doing resume coaching.

LEFLER​: And Stewart and the group decided, we’re gonna keep working until everyone
else has another job. I received many calls and emails from people asking for me to
come in for an interview. After about a week, I had a couple of offers.

BUTTERFIELD​: And we ended up getting every single person a job. We were able to
give customers a choice of their money back, or they could let us keep it, or we could
donate it to a set number of charities. So we were able to do that in a way that was really
kind of elegant, and built a lot of good will that would be useful for us later.

HOFFMAN​: Here’s the key to managing through a pivot— those employees, if they feel taken
care of, they’ll keep taking care of you. Tim and his teammates threw an epic goodbye party for
Glitch’s online community.

LEFLER​: There was so little ill will that a lot of us, myself included, we still worked for
another couple of weeks, because we believed in the product. We believed in the game.
And so what a lot of us at Glitch wanted to do, is we wanted to kind of give them a nice
send-off.

We had a horseman character. He was supposed to be a horseman of the apocalypse,

and he was carrying this doomsday bell, and he would just walk around saying like the
end was nigh, or the end was nigh. I’d imagine that seems like a joke that we would
have put in it. There was a rallying cry from a lot of the users around, having these “end
of world” parties. There would be a big party in this one area of the world, and everyone
would hang out and jump around, and have a big social gathering within this world. And
then it would get shut down, and then we’d move somewhere else.

The horseman had to be designed, the horseman had to be drawn and animated, had to
have sounds attached to it—there was a bunch of people involved. So yeah, there was
effort put in. Obviously, it was limited effort, because we were all busy trying to find work,
but there was effort nonetheless.
HOFFMAN​: Stewart and his team embodied this idea of ending in the best way possible. And
this isn’t just the ethical, human thing to do; it’s also the smart, strategic thing to do. Those
employees, those investors, those users—they’ll come back.

BUTTERFIELD​: So it was really, really tough. And it's easy to look back on it now, and
it's character building—and in fact, we ended up hiring that same guy back, and he's
been a Slack engineer from the early days—everything worked out well there.

HOFFMAN​: While they were essentially shutting the company down, Stewart and his team start
the “Hail Mary” process again—a process that Stewart is very familiar with by this point. They
had money in the bank, and a mandate to make something, ​anything​ that could scale. They
took a long look at all the technologies they developed for the game, and asked themselves:
“Was there anything there?”

BUTTERFIELD​: We definitely knew that we wanted to keep working together, and we

still had money left. Investors didn't want their money back, because—I don't need to tell
you, but why would you rather take a two-third loss when something might come out of
it?

We still had five-and-a-half million dollars, or something like that left in the bank. So we
didn't have to shut down, and I think that there's a real temptation to go to the last dollar
and hope that there's some kind of "Hail Mary" that will save it. The good thing about
shutting it down early was that we had the ability to just not do anything for a couple of
months.

Within a couple weeks—I think three weeks—we decided—and there was a lot of stupid
ideas first—but we decided that this internal communication system we had developed
while we were working on the game—that could be a product, and we started building
that. And we had a great practice, but it was a vision that might have well been passed
down on to the mountaintop.

HOFFMAN​: So, Stewart didn’t get food poisoning on a plane this time, but once again, he found
an unexpected way to pivot. He found his scalable product in a communication tool his team
had developed for internal use—a chat-based tool for his remote team that would eventually
become a product called Slack.

And at first glance, this goes against something I know to be true: The most successful pivots
stay somewhat close to the company’s original mission. This is where Stewart is the exception
to the rule. I typically tell founders to ask themselves: “OK, in the path we’ve taken, is there
anything that we’ve seen or found along our path that could lead to an alternative play?” It’s not
the kind of thing where you pull ideas out of nowhere. “Hey, we’re just going back to the
whiteboard here, what do you think? Should we make an ecommerce site, how about a mobile
game? What about a pizza delivery restaurant?”
No, no. “From ​our ​path, what do we see?”

A chat-based communications tool is a really far cry from the online game that Stewart set out to
build. But then again, it was a tool they already developed and used themselves. So it gets at
the more fundamental rule of successful pivots—there has to be some kind of compelling
reason why this team is going in this direction.

And Stewart’s team knew exactly why companies would adopt this new tool—they created it to
meet their own needs, to communicate quickly, transparently, and ​permanently​.

BUTTERFIELD​: When we first got started, and there was only four of us, the natural
thing for us to use was a very old Internet protocol called IRC—an Internet relay chat. It
pre-dates the Web by a couple years. And because it's so old, it misses a bunch of
features that are now considered just standard.

So one of the things it misses is store and forward of messages. So if I want to send you
a message, and you're not connected at the moment I want to send it, I just can't.
There's just no way for me to do it. And so we built a bot that would log all messages
that were sent when you were offline, so you could read them when you got back online.
And once we had that, we were like, oh. Wow. It would be super convenient to be able to
search these messages, and since we already had them in a database, it was easy to
search them.

It wasn't something that we thought about, or talked about. It didn't have a name. It was
just in the background. But as we started hiring people, they would join and they would
have this archive of everything that happened before they got there—as opposed to
most companies, where you hire someone and they start with an empty inbox. They're
completely cut off from that history.

But again, it was—and this, by the way, I think is the greatest software development
methodology that's impossible to replicate. Which is, don't think about what you're doing,
have no ego. There's no speculation, there's no, "I can imagine a user would want to."
To spend a minimum number of minutes addressing the most aggravating problems that
you have, and just use it, and then see.

HOFFMAN​: So, as Stewart puts it, he had the idea that was “passed down from the
mountaintop.” The core technology was already built. Now all he had to do was convince his
team to make the product. Stewart could see three steps ahead at this point.

BUTTERFIELD​: There's this deck that I put together that was like, "I think we should
make Slack." So we hadn't actually started making it yet, and I showed this to new
employees when they start at Slack, and it's in our archive. Because the amazing thing
 is, it had the pricing that we went live with, it's exactly the product vision, it's exactly the
way we marketed it.

Everything was preset, and we didn't have to change it—because, I think, we had
three-and-a-half years of practice, and finding product-market fit for our market-of-one
team.

HOFFMAN​: The market-of-one team that Stewart is referring to is the team that was making
Glitch, the team that had made the communications tool that would turn into Slack. They’d spent
three-and-a-half years creating a hit product, and they didn’t even realize it. But once he had the
pitch deck in place, it didn’t take long for him to take action. They were building Slack.

BUTTERFIELD​: I think all that stuff actually took place in 72 hours, and within a week,
we were definitely on this plan.

Well, I think that we knew that we had something, just because of the value we got out of
it. And the other thing I talk about is going to an Andreessen Horowitz partner meeting,
at the end of 2012—I hadn't been in a while. They led our series B, and we were going
to tell them, "Here's what we're doing."

And part of the pitch was, “We think that one day, in the fullness of time, if we're
incredibly successful, we will get to $100 million dollars in revenue on this business, and
that it could thereby be a billion-dollar business.”

And there was a lot of "Pfft, good luck"—not a huge degree of enthusiasm. But, you
know, that was our whole ambition, and we exceeded that last year, and we doubled it
again this year. We really underestimated how big of a deal it could be.

HOFFMAN​: How do you go from “Pffft, good luck” to a $5 billion valuation? Pivots and
persuasion.

BUTTERFIELD​: We also underestimated how hard it would be to get people to switch,

because no one thought that they needed anything.

We weren't competing with anything else that was out there, other than the use of email,
which is pretty much impossible to compete with, and whatever it was that people
did—whether that was using a bug tracker, or a wiki, or Google Hangouts, or Skype. No
one thought that they needed Slack.

HOFFMAN​: Its genius is, “You're a madman, but you're right.” And this is part of the
creating a new market.
 BUTTERFIELD​: We went out and started trying to convince other people to use it, which
was way harder than we thought it was going to be.

Social proof was a thing that we needed. So we needed to be able to point to teams
other than our own, because of course we used our own product. So we had some
friends who worked at Rdio—the music-streaming service, now defunct. And I was on
the board of a company called Cozy, which is a landlord-tenant app, and I had a friend
who had a company called Wantful, which is a gifting service. And we just went to their
offices over and over again, and tried to figure out ways to explain why we thought it was
valuable.

They were friends, first of all, and they were very tech-forward, they were enthusiasts,
and they would want to try new products.

But what actually made it hard was, you have to get a whole group of people to change
all at once; it wasn't just one person. The benefit of that, though, once you're able to
break through, is once the group starts doing it, what was difficult about it becomes its
benefit. It's very hard to get the group to change to anything else once they switch. So
Slack was a really interesting product to scale in the early days, because it had very,
very little network effect between companies, but a huge binary, 100% or just nothing,
inside of companies.

HOFFMAN​: So there were companies to cajole, influencers to influence, hearts and minds to
win. The overarching driver of Stewart’s success? The ability to tell a great story—one that
inspires people to go on the journey with you, as you make some seriously bold moves. It’s one
of his entrepreneurial superpowers.

BUTTERFIELD​: If there was one piece of advice I wish I could phone back and give to
myself, was just concentrate on that storytelling part, on the convincing people. Because
if you can't do that, it doesn't matter how good the product is, it doesn't matter how good
the idea was for the market, or what happens in the external factors, if you don't have
the people believing.

HOFFMAN​: When Stewart knows that it’s time to slash and burn the business, the only way to
lead your team with you on the journey is to turn it into a great story. Find those moments where
everything changed, whether it’s throwing up in the hotel bathroom, or having a mountaintop
moment you have to bring to your team. Figure out what your story is, and it will go a long way
to bring your co-founders, employees, and investors along with you.

And you’d be surprised who might come back to help. Remember Tim Lefler, the engineer that
Stewart had to lay off? He was naturally a bit reluctant to take another job offer from Stewart.
 LEFLER​: I got an email from Stewart—and getting an email from somebody who
previously laid you off, talking about work, you’re a little cagey on that. But there was no
reason I wasn’t going to meet Stewart for coffee. He gave me the rundown of what was
going on, and just said, “Hey, we’d like to have you back and working on this product
with us.” I had decided I was going to stay out of the startup world again, and this was
another risk.

I talked it over with my wife. My wife is quite the opposite of me when it comes to risk.
She said, “If you were to leave where you’re working and go work for Slack, and Slack
fails, how sad are you going to be that you need to find another job?” And I’m like,
“Yeah, it would suck, trying to find another job. And the job I might get might be worse
than what I’m doing now.” But then she said, “Well, what if you stay where you are, and
Slack becomes a huge hit?” And I basically said, “Well, I would feel really bad about
that.” And so that was the clinch decision for us, and we ended up moving.

HOFFMAN​: Yes, Tim and his family moved ​again.​ Fortunately, it was the right move this time
around, and when he arrived at the office, he was surprised to find that he wasn’t the only
battle-scarred employee to rejoin the team.

LEFLER​: I came back with a bunch of people that had also been cut, and were coming
back for the same reason. It felt like a bit of a reunion. It was a nice feeling, kind of a
familiar feeling.

HOFFMAN​: So what seemed like the end of the road for Stewart and his team, was, in truth,
only the beginning. Bear that in mind if you ever have to slash and burn your business.

I’m Reid Hoffman. Thanks for listening.

Masters of Scale Episode Transcript: Tristan Walker

KATHRYN MINSHEW:​ I had been turned down 148 times.

REID HOFFMAN:​ That’s Kathryn Minshew, co-founder and CEO of The Muse, a career
development website that she pitched to investors 148 times—not that she was counting.

MINSHEW:​ There were literally days where I had a “no” over breakfast, and “no” over a
10:30 AM coffee, a “no” over lunch. Disinterest at 2:00 PM , somebody who left a
meeting early at 4:00. And then I would go to drinks and feel like I was being laughed out
of the room.

And when we finally raised our seed round, I went back and counted. It was both painful
and gratifying at the same time, looking at all those names, and thinking, “I remember
that ‘no,’ I remember that ‘no,’ I remember that ‘no’”—and they sting; every one stings.

HOFFMAN: ​Today, the Muse serves users in the millions. Kathryn raised $16 million last
year—and her tale is the origin story of most great startups. So if you’re hearing a chorus of
“no”s, you should look for other signs that you’re onto something. I believe the best ideas often
appear laughable at first glance.

[THEME MUSIC]

HOFFMAN: ​I’m Reid Hoffman, co-founder of LinkedIn, partner at Greylock, and your host. I
have a theory that the best business ideas often appear laughable at first glance. The lesson for
entrepreneurs goes deeper than the pat advice that you shouldn’t take “no” for answer. You
should ​expect​ to take “no” for an answer. If you’re laughed out of the room, it might actually be a
good sign.

I’m going to test this theory by talking to some of the smartest people I know. Many of them
have spent time in the rejection line. Google, Facebook, Linkedin, Airbnb all sounded crazy,
before they scaled spectacularly. On this episode of Masters of Scale, I want to to help you see
what the transformation from a crazy idea to a clearly good idea looks like, and what signs to
watch for along the way. We’ll talk to several CEOs, but we’ll focus on one entrepreneur’s
journey, from beginning to now. It starts in a city far, far away from Silicon Valley.

HOFFMAN:​ So you're not one of those classic Silicon Valley geek people.

WALKER:​ No, not at all. [Laughs]

HOFFMAN: ​That’s Tristan Walker, the founder and CEO of Walker & Company. Their flagship
brand is Bevel, a razor for men with curly facial hair. He started as a kid in the projects.
 WALKER: ​I like to say I had the whole “rose that grew from concrete” story. I grew
up—projects, welfare, all that jazz. I had one goal in life, and that's to get as wealthy as
possible as quickly as possible, and I realized that there are three ways to do it. The first
was to be an actor or an athlete, and that didn't work out for me too well at all. The
second way is to work on Wall Street. I had the good fortune to do that for about two
years, and hated it. So I said, “Damn. I've already exhausted two of the three. The last
one is entrepreneurship—and the day I came to that realization, I applied to the
school—Stanford—for business school. Fortunately they let me in, and then I learned
that Silicon Valley existed—and the rest is history.

HOFFMAN: ​You came to Stanford not even knowing it was the heart of Silicon Valley?

WALKER: ​I had no idea.

HOFFMAN:​ Tristan doesn’t sound like your typical Silicon Valley geek. But I can’t stress this
enough—you don’t have to wear a food-stained hoodie to succeed here. Neither do you have to
play World of Warcraft, or write code until sunrise. You only need to have a sense of
curiosity—and Tristan was exceptionally curious. He wasn’t just a student of business, he was a
student of every technological shift taking place around him.

WALKER: ​I was in accounting class at Stanford, and I remember MC Hammer was

supposed to speak at Stanford. And there was this commotion going on—people
wondering if he was actually going to do it. It was going around for five minutes, and I
opened up Twitter, and I just asked MC Hammer, “Are you coming?”

HOFFMAN:​ Bear in mind this is 2008, back when Twitter had a relatively cozy community of
500,000 monthly users. Tristan was one of the more active members. As luck would have it, it
was Hammertime on Twitter.

WALKER: ​30 seconds later he replied back, and I turned around to my fellow
classmates, and said, “Yes, he's coming. See?” At that point, I realized how important
Twitter’s part in the innovations within communication were. And it was my first
understanding of bad ideas being a good idea—because everyone else around the table
was like, “Why are you on Twitter? What's the point of this thing? I don't care about what
you're eating for breakfast.” They just didn't get it. And ​that​ showed me that there was
something there that I had to kind of dive into.

HOFFMAN:​ So we’re already seeing the seeds of Tristan’s success. You don’t have to be a
geek, but you ​do​ need to geek out over the new ideas. You want a level of enthusiasm that’s
slightly out of step with your peers. And Tristan was seriously geeking out over Twitter. He
wasn’t just an early user—he wanted to help build the company.
 WALKER: ​So I emailed 20 different folks who I knew were either one or two degrees
separated from the company. The last person I emailed was David Hornik, because he
was a professor at Stanford, and also a partner at August Capital. He replied back, he
said, “Come in my office, let's talk.” David asked me two questions.

DAVID HORNIK:​ Tristan, are you willing to work for free for the summer?

HOFFMAN:​ That’s David Hornik, by the way.

WALKER: ​[Laughs] And I said, yeah.

HORNIK:​ I’m happy to introduce you to Twitter. I’m curious if you actually know what
Twitter does.

WALKER: ​Yes. And at the time, they weren't thinking about the business model, and I
was fascinated by what it can become.

HORNIK: ​Send me your resume and I’ll send it to Ev.

WALKER: ​Probably two days after that, Evan Williams sent me an email.

VOICE​: Evan Williams is the founder and former CEO of Twitter.

WALKER:​ Saying, “Come in for an interview.” And a week after that,

they gave me an internship at Twitter, and I worked there for about six, seven months
when there are 20 folks at the company.

HOFFMAN:​ You may think Tristan is lucky to get an email from Ev Williams. But notice the size
of Twitter’s workforce at the time—20 employees total. Tristan spotted the company’s potential
not just ahead of his classmates, but ahead of the market. He has a knack for spotting ideas
right before blast off. David Hornik noticed this too.

HORNIK:​ Twitter was nothing when Tristan was excited about it. Twitter was a place that
you told your buddies you were heading to the park. Twitter, at the time, was a service
where you said, “I’m eating a delicious ice cream cone.” It was entirely unclear what one
did with Twitter, how one could make money at Twitter, how big Twitter would become.

HOFFMAN: ​Shortly after his Twitter internship ended, he started his next email campaign. He
bombarded the founders of a fledgeling startup called Foursquare. And again, the CEO, Dennis
Crowley, responded.

WALKER: ​I emailed them eight times—the eighth time Dennis sent me an email—I'll
never forget, this is verbatim—he said, “Tristan, you know what? I just may take you up
 on some of this. Are you ever in New York? Dens.” That's it. I was in LA at the time, and
I was sitting on the couch with my wife, and I said, “How should I reply to this guy?” Ten
minutes later, I sent him an email and I said, “Actually, I was planning on being in New
York tomorrow.” I booked my flight that night, flew out the following morning, hung out
with them for a week, and a month later I was running business development for the
company.

HOFFMAN:​ By now you may be thinking, “Holy cow, CEOs are awfully responsive creatures.”
But before you start dashing off messages to the employers and investors of your dreams, I
should warn you—few stories end like Tristan’s. I've had the experience where I was walking
out of Greylock, and a guy said, “I've been waiting here all day to meet you.” And I'm like, “This
isn't the way to meet me. I'm going to continue walking to my car, and I would try to get a
reference to me. This will get me to never pay attention to you again.” You go into my security
services file of people to track—that file exists.

But Tristan’s pursuit of Foursquare had a happier ending. That’s because he targeted teeny,
early stage companies—startups with 20 people or less. The lesson here is not just his
persistence, but his prescience. Some people get lucky, and board a rocket ship by chance. But
two rocket ships? That’s no coincidence. That’s a sign you can spot an undervalued idea ahead
of your peers. It’s like this spidey sense that just keeps tingling. It’s hard to stay in one
job—even at a wildly successful company—once you’ve started sensing opportunities all around
you.

WALKER: ​When I started at the company we had zero merchants, zero brands on that
platform. By the time I ended up leaving Foursquare—even a couple of years later—we
had over a million merchants on the platform. By the time I left, we were 150 people. I
started when we were three. And quite frankly, I wanted to go out and build ambitious
things myself.

HOFFMAN:​ So Tristan left FourSquare in 2012, after building their business development team
from the ground up. He then found the perfect place to plan his next move. Ben Horowitz, a
founding partner at the iconic venture capital firm Andreessen Horowitz, invited Tristan just hang
around the office and think big.

WALKER: ​Ben said, “Come spend six to nine months with us to figure out what you
want to do.” I spent all nine months there. I like to say I spent the first seven months of
my time there wasting their time. I wanted to build a bank. I wanted to fix freight and
trucking. I want to fix obesity in the country, in the world.

HOFFMAN:​ Then inspiration struck.

WALKER:​ I just got frustrated by the shaving experience.

HOFFMAN:​ A better shaving experience may not sound like the idea on the scale of freight
trucking, obesity, or banking. But the most scalable ideas don’t have to tackle dramatic
problems—they have to tackle neglected problems. And the more that Tristan looked into the
history of shaving, the more he realized that there was a hugely overlooked demographic—men
with coarse or curly facial hair, who had been living with the curse of razor burns and razor
bumps for so long, they no longer even recognized it was a problem. Let’s just get a handle on
this coarse or curly hair dilemma, which, I’ll admit, is outside my particular area of expertise.

1950s COMMERCIAL VOICE​: Are you fed up with razor burn?

HOFFMAN: ​For decades, razor manufacturers have promised a better shaving experience.
They identify the same problems:

1950’s COMMERCIAL VOICE​: Are you sick of nicks, cuts and unsightly razor bumps?

HOFFMAN:​ And offer essentially the same solution—more blades in every cartridge.

1950’s COMMERCIAL VOICE​: Not one, not two, but three blades.

HOFFMAN:​ A lot more blades.

1950’s COMMERCIAL VOICE​: Yes, five blades to whisk away those stubborn whiskers.

HOFFMAN:​ And this ever-growing stack of blades did actually improve the shaving experience
for a lot of men.

1950’s COMMERCIAL VOICE: ​We tested our six-blade razor on 1,200 men. Two out of
three reported a smoother, cleaner shaving experience.

HOFFMAN:​ But it mostly worked for white guys like me—white guys with straight hair. But the
rest of the population—and especially African-American men—were experiencing a multi-bladed
assault on their skin. Their shaving experience got worse. And this went on for generations, until
a dive into history opened Tristan’s eyes to a problem that no one else could see.

WALKER: ​So I reached out to an old, retired executive from a CPG company. He said,
“Tristan, look at photos of black men 100, 120 years ago. None of them had razor bumps
or shaving irritation on their faces.” I thought he was being facetious. So I said, “I have
time, and an interest in arts. I should look it up.” I went to Flickr and I entered all these
generic search terms like “Harlem Renaissance,” “black in the 1920s,” that sort of thing. I
went through 1,200 photos, and I didn’t find one with a non-cleanly shaven face. And
that had to do with the tools they used.
 In 1904, this whole industry was built by a gentleman named King Gillette. He had this
amazing idea. He said for hundreds of years, barbers have been using this thing called
the straight razor to great efficacy. It cuts the hair level with the skin, not beneath.

But using a straight razor yourself at home is pretty hard to use, if you're not trained. So
he had this idea, he said, “What if you can take a single blade, house it within a safe
head, attach a handle to it, take it home with you, and shave?” And that started the
mass-market shaving industry as we know it.

Fast forward 20 years later—they lose the patent. Many would argue that the only
reason we have two, three, four, five, six—blade razors today is purely due to patent
protection. But actually, it has less efficacy, and if you travel internationally, single blade
is more popular than multi.

HOFFMAN:​ His solution? He re-engineered the single blade razor, specifically for coarse or
curly hair. He called it the Bevel, and it became the flagship product for Walker & Company, and
the first step in his grand plan. He envisioned a health and beauty company on par with global
brands like Procter & Gamble—a company that devoted its attention to men and women of
color. It was blindingly obvious to him that this company should exist.

WALKER: ​I mean, a lot of people say that they're trying to build the Procter & Gamble
for people of color. Let me talk about this for a second, because it's really funny. Number
one—I've never said that. And then two—it's interesting—I think folks talk about it as if
it's a niche kind of thing, but people of color are the majority of the world. So if we’re the
Procter & Gamble for people of color, what the hell is Procter & Gamble?

HOFFMAN:​ But when you’re pitching a room full of mostly white, mostly male investors, it can
be hard to convey the urgency of this market oversight. So how did the best and brightest VCs
respond to Tristan’s idea?

WALKER: ​“I don't know. It's niche. I don't think it's scalable.”​ ​It's a terrible idea for me to
jump into the Bevel thing, because there was a consumer group who didn't want it, an
industry that is dominated by the multi-blade use case with billions and billions and
billions of dollars to attack you with patent protection, et cetera. And to do it in like Silicon
Valley—that's crazy.

HOFFMAN:​ As is often the case, there was one lone champion.

WALKER: ​I go to Ben and he's like, “That's the idea.” And at that point I knew I had
something—quite frankly.
HOFFMAN:​ This may sound like a strangely optimistic reaction. Why should a single
endorsement from an investor outweigh a crowd of investors telling you, “Thanks, but no
thanks?” Shouldn’t you weigh all of the feedback equally? Short answer: No. And here’s why.

The first truth of entrepreneurship and investing is that the very big ideas are contrarian,
because the contrarian is part of the reason why a bunch of large companies and competitors
haven't already done it, why a bunch of other entrepreneurs haven't already succeeded at it.
And so that leaves the space for the creation of something—and to create something big, you
have to have that initial space. For example, in the early stages of Google, search was a
terrible way of making money in advertising, because advertising is time-on-site. And what does
search do? It shuffles you off the site as fast as you can go. That’s not a good business model.
So at Airbnb it’s like, “Someone’s going to rent a couch or a room from someone else? Who are
the freaks on both sides of that transaction?” So all of these things have this kind of similar
quality—very smart people will tell you, there’s no there, there.

So you have to gird yourself for a string of rejections. Some entrepreneurs simply develop a
thick skin. Others treat it like a normal part of their workday. You know, wake up, brush your
teeth, listen to people crush your dreams. It’s a living.

But there’s another, more hopeful approach. Our producer,​ ​Dan Kedmey, talked with a number
of entrepreneurs who pitched seemingly laughable ideas in all kinds of industries. Like Abby
Falik, founder and CEO of Global Citizen Year. Her not-for-profit sends students abroad for a
year of international service between high school and college. Back in 2008, she was struggling
to get funding, and she turned to a leadership coach for advice. We asked her to share that
advice.

ABBY FALIK:​ The “no”s are actually a gift.

HOFFMAN: ​You heard that right, a ​gift.​

FALIK: ​And he said between now and when we talk two weeks from now, I want you to
go out into the world and gather as many “no”s as you possibly can. It is your homework
to be rejected over and over and over and over, and come back and report on it. And it
ended up being the most important thing I could have ever done, and the most important
advice I could have been given at that point.

HOFFMAN: ​The most successful entrepreneurs listen closely to the “no”s. They mine their
rejections for clues. Kathryn Minshew, the founder of The Muse, got her share of rejections over
the course of 148 “no”s she shared at the top of this episode. We asked her for the reasons that
investors turned her down.

MINSHEW:​ “It's a bit too early for us, but keep in touch.” “Once you hit 100,000 monthly
active users, give me a call.” “This is a fool's errand. It's expensive. It doesn't scale.”
 “That's not very tech, that's not a scalable platform.” “Aren’t you worried that you're going
to lose all your users once they turn 30 and have babies?” Or, “I get that women in New
York and San Francisco love this product, but I think you're going to really have a hard
time finding women who care about their careers once you go outside of the coasts.”
And I just remember looking at these people and thinking, “Do you know a lot of
women?”

HOFFMAN:​ Kathryn is right to ask this question. She knows more about women than most
investors, and she also knows more about her business. Entrepreneurs have to learn how to
hold on to what they know through the arduous pitch process. Kara Goldin, the founder and
CEO of Hint Water, takes this a step farther. When she was hard at work on a recipe for a
flavored drink with no sugar or preservatives, a bigwig in the beverage industry offered her
pointed advice. What I want you to notice is how Kara listened to his rejection. She didn’t just
hear a “no”; she saw the breadcrumbs leading to her own company’s success.

KARA GOLDIN:​ His response was “Sweetie, Americans love sweet.” That’s really
interesting that he just called me “sweetie.” I'm a business person. I had been zoned out
of the conversation, and came back in, realized that somebody at a major beverage
company basically was sharing with me, without him knowing it, that that was really what
the belief was at this major soda company—that Americans really love sweet. That was
the fork that they were taking in the road, and that I needed to put the gas on and grow
this before they decided to come down my fork as well.

HOFFMAN:​ Turns out that Kara’s critic was wrong to the tune of $90 million a year. That’s how
much revenue Hint Water takes in from Americans who ​supposedly​ have incurable sweet
tooths.

At this point, you may be thinking about your own counterpoint to my theory. Sure, Kara and
Kathryn ultimately secured funding and proved their critics wrong. But what if you’re pitching a
truly terrible idea? How can you learn to hear that?

So how can you tell a ​truly​ bad idea from a bad-sounding idea? How can you be sure ​your​ ugly
duckling could become a swan? This is the key: You have to pay attention to the quality, not the
quantity of rejections. You want to see at least a teeny minority of investors ​squirm​. You don’t
have to get them to a “yes,” but you should detect some friction, as they reason their way to a
“no.”

Tristan has a keen ear for this quality in his conversations. He can pinpoint, down to the
PowerPoint slide number, the moment his audience stops paying attention.

WALKER: ​I had a slide in there—I think it was like slide 14—where I talked about
Proactiv—the acne system—as a good analogy to what we're trying to do. It's the
difference between Gillette and Bevel, as Neutrogena and ProActiv—it's a system that
 solves a very important issue. And this VC looked at me—and I'll never forget this—he
said, “Tristan, I'm not sure issues related to razor bumps, shaving or irritation are as
profound and big an issue for people as acne.”

At which point, I said, “I kind of understand what you're saying, but all you had to do was
get on the phone with 10 black men, and eight of them would have said, ‘This is a
permanent thing I have to deal with.’ All you had to do is get on the phone with 10 white
men, four of them would have said the same thing. Could have done it for women too,
and you would get the same ratios.” So it wasn't that it was a bad idea, or not as
important—it's just that that person was unwilling to acquire the context necessary to
understand what we're working on. That's just laziness—and at that point, I can't fix that.
So I just move on until I find somebody who understood it.

HOFFMAN:​ Notice how quickly Tristan’s mind moves on to the next investor. When the quality
of the questions drops, he knows, mid-pitch, that the conversation is over—the rest is noise.
Those half-hearted questions are like the elevator music of the pitch process. It’s meant to
pacify entrepreneurs. In fact, it grates at them. It also wastes their time. Tristan will tell you he
prefers a hard “no” to a comforting “maybe.”

WALKER: ​Silicon Valley investors will tell you all the time, “We want to invest in people
who can execute with some semblance of pedigree, chasing a significant white space
and a big opportunity.” For us, it was like “Check, check, check, check”—and we heard
99 percent “no”s. How much is bullshit, right? And you’re just trying to say something
that I want to hear, as opposed to telling the truth. And I wish that Silicon Valley would
tell the truth a little bit more.

HOFFMAN:​ Tristan raises a really interesting question here. How much of this investor
hemming and hawing is, well, bullshit? What’s really going through their heads? As a partner at
Greylock, I want to share what happens after an entrepreneur leaves the room, and an investor
is left to mull over a crazy idea. It begins with the debrief of the investor’s partners.

If I'm presenting an idea to my partners at Greylock, and they all go, “That's great! We should do
that.” I'm like, “Shit. Here's a bunch of hyper-smart people and no one's saying, ‘Oh, watch out
for this, or watch out for that.’” It’s too easy. The idea is so obviously good, I can already hear
the stampede of competitors trampling over our hopeful little startup. On the other hand, you
don’t want every person in the room to say, “Reid, you're out of your fucking mind,” because
then you're wondering, “Hmmm, am I drinking the Kool-Aid in a very bad way?”

What you want is some people going, “You guys are out of your minds,” and some people
going, “I see it.” You want a polarized reaction.

So take my decision to invest in Airbnb as an example. David Sze told me during the Airbnb
debrief:
 VOICE: ​David Sze is a partner at Greylock Investment.

HOFFMAN: ​“Well, every venture capitalist has to have a deal that doesn't work that they learn
from. Airbnb can be yours.” And David Sze is a super smart VC; he invested in LinkedIn. He
invested in Facebook. He invested in Pandora. He personally returned two-and-a-half billion
dollars to Greylock’s funds. He’s as smart as smart money gets—and believe me, I weigh his
objections carefully. If someone as smart as David disagrees with me, I worry.

But I also get excited—it’s an emotional roller coaster. And as this sort of emotional turmoil
plays out in the background discussion, it’s hard to give an entrepreneur a hard “no.” The best
ideas make you want to say “yes” and “no” in the same breath.

This mixed reaction can strain the relationship between investors and entrepreneurs. To give
you one pointed example, my friend Josh Kopelman, a founding partner at First Round Capital,
tweeted a picture of a letter he received from a spurned founder. It was a message printed in
huge black letters. The sender, who will remain anonymous, wrote:

"Dear Josh, We'll see. I think you've already f*cked yourself over by getting left out of this deal.”

Josh commented on his tweet: “Well, that's one way to respond when a VC passes.” But I talked
with Josh, and that tweet doesn’t even begin to capture the full range of emotions he
experiences when he turns down a founder.

HOFFMAN:​ So—just a personal question—why did you tweet the letter? What was the
impulse?

JOSH KOPELMAN​: It wasn’t to mock him. It was just to almost show that I recognize​ ​I
have a privileged life. Just because I say “no,” it doesn’t end there.

It’s a hard thing. I’m an optimist, you’re an optimist. The job is 99% percent of the time,
we’re saying “no.” And so when you become a VC, you have to try to figure out what
style of VC you are. But I’ve actually found that when you’re going to pass, being able to
be explicit and transparent about it, and also doing it up front—probably the same
experience you had. When I was raising money, there were three types of VCs. My
favorite were the quick “yes.” My second favorite were the quick “no.” And my least
favorite was the long, drawn out, “Maybe if you show me this and prove this.” I knew that
I wanted to be in class one or two, and that’s what I optimize for—you know, quick “yes”
or quick “no.”

HOFFMAN:​ The problem with the type-three VC is actually they’re damaging the
founders, and they’re really just trying to play out their own image. You know, their own
option on this.
 KOPELMAN:​ That’s exactly right. “Why say no? I’ll just wait around the hoop and maybe
if something changes, I’ll get a shot in.” It is very damaging for a founder. Many
founders—because they’re optimists—they have happy ears. They hear that as, “Oh,
this VC is interested,” when what they really should be doing is just saying, “Thank you.
Let’s move on to someone else.” Now on the other hand, I’ve got quite a long woulda,
coulda, shoulda list, so, as I tell most founders—there are plenty of companies that are
in that anti-portfolio, so I’m often wrong.

HOFFMAN:​ Are there any particular founders that you passed on that you’re haunted
by?

KOPELMAN:​ Yes. I try not to obsess because the list is so long.

HOFFMAN​: I like the way that Josh described his list of missed opportunities. Every VC,
including me, has a list like this—an anti-portfolio. The startups you might have funded, which
cast a long shadow over your conversations with entrepreneurs. And if you—as an
entrepreneur—see a flicker of that shadow cross an investor’s face, that should give you
comfort. Ultimately, you need to get used to being a lone champion. And there’s a question
Tristan poses to himself, which is a good question for every entrepreneur who’s in the depths of
a grueling pitch process.

WALKER:​ What do you fundamentally feel that you're the best person in the world to
do? Really be thoughtful about that. Increase your humility a little bit, and really think
about what you're uniquely qualified to do, and then too, chase the best ideas.

HOFFMAN:​ It may be that there are 100,000 people who could go solve this problem if they
knew about it, if they're motivated by it. But of those 100,000, you may be the only one who
knows about it, can assemble the resources, and wants to do it. One of my favorite quotations is
from Robert De Niro in the movie Ronin, which is, “If there is a question, there is no question.”
And the parallel in entrepreneurship is, “If you do not have an absolutely solid theory of
competitive differentiation, you do not have have competitive differentiation.” And it's really
important to have competitive differentiation.

For example, if you said at the beginning of LinkedIn what was my differentiation—my
differentiation was I understood virality. Am I an expert on careers and the job recruiting
marketplace and hiring? No. So “I'm the unique, perfect person” doesn't mean that when you
line up every attribute, you turn out to be the only person. It’s actually that you're taking a unique
shot, and you have a unique ability to take that shot relative to competition.

And once you’re certain of your competitive advantage, you’ll no longer feel like you’re waging a
quixotic battle against conventional wisdom. You’ll feel like the world must eventually come
around to your way of seeing things.
 WALKER: ​I think health and beauty is doomed for all types of reasons I could suggest
and talk to you about. But one in particular really sticks with me, and still does to this
day. I think all global culture is led by American culture, which is led by black culture in
the US, and more recently, in SIno-Asian culture. The big frustration of mine is my living
in the earliest adopting region on the planet, and its knowing very little about the earliest
adopting culture on the planet. That discord doesn't make too much sense to me.

So I'm trying to show folks that here's one of these kind of lost industries that have seen
no disruption—certainly with technology—have seen no disruption, certainly, with this
demographic group that I understand, and the cultural impact of it. You start to see this
demographic group becoming the majority of the country with increasing wealth, access
to technology, as the early adopting culture on the planet. My experience of not having
products that worked for me. My ability to potentially raise money for that thing—I don't
think there's anyone better on the planet to do this one thing than I. And the day I came
that realization, it was the most freeing moment for me, and I didn't care about hearing
the “no”s anymore, because I knew that we had something.

HOFFMAN:​ I’m Reid Hoffman. Thank you for listening.