We Study Billionaires - The Investor’s Podcast Network - Classic 19: Billionaire Reid Hoffman Lessons Learned

Starting point is 00:00:00 You're listening to TIP. In today's classic episode that recently aired back in February 2019, Preston and I discussed the lessons we learned from Silicon Valley billionaire Reed Hoffman. Hoffman established his fame in the value by being the CEO of PayPal and working alongside people like Elon Musk and Peter Thiel. After PayPal, Hoffman went out to fund LinkedIn in 2002, and December 2019 sold LinkedIn to Microsoft for $26 billion. Also, through the years,

Starting point is 00:00:29 Hoffman has invested in some of the most promising companies like Airbnb, Blockstream, and many others. During this classic episode, we'll be covering some really interesting points about business and how Hoffman was so successful in building startup companies that's been turned into multi-billion dollar enterprises. Let's get started. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Hey, everyone, welcome to the show. I'm your host, Preston Pish. And as always, I'm accompanied by my co-host Stig Broderson. And like we said in the introduction, we're going to be covering billionaire Reid Hoffman today. So let's go ahead and just jump right into the show. For the first question, we're going to play here. Reed was asked the question, what is the secret to success of Silicon Valley? And this is how he responded. In 2013, 2014, I was on a panel in London with some, I have a,

Starting point is 00:01:39 have to figure out the exact date with some Silicon Valley friends. And we were asked what the secret of Silicon Valley is. Because just like the stats that Gina started with, it's roughly speaking rounding up in the entire Silicon Valley area is 4 million people. That's not 4 million people in the tech industry. That's 4 million people altogether. So the tech industry, tiny fraction, half of the NASDAQ.

Starting point is 00:02:04 Why is that? And the answer that Silicon Valley people frequently give is they say, well, We have this environment where people can immigrate here. We have an entrepreneurial culture that allows a general risk taking and doesn't penalize failure. We have venture capital. We have technical universities, technical companies, and we have enough shots on gold that this emerges of interesting things. And I was reflecting as I was hearing this answer from my co-panelists that we were really doing a disservice to the entrepreneurial community, in this case in London, because it was like, well, you just need to get your, because they had all of the,

Starting point is 00:02:39 things other than the fear or fail your culture. It's like, you just need to be bolder. You need to have less fear. And then you'll be just like Silicon Valley. And it was like, okay, this is really kind of a disservice where we really want kind of this entrepreneurial understanding, this spread everywhere. We want more places to be able to learn techniques like this, do this. It creates the technological innovation in the future, the companies of the future, the jobs of the future. It's a very good thing. And so I started reflecting on why the answer was insufficient. And what I realized was it wasn't so much the startup phase, which you now have in at least 100 other areas other than Silicon Valley, even excluding China, and maybe it's hundreds. But it's actually, in fact, this pattern of getting

Starting point is 00:03:17 the scale. And it's a combination of a talent network. It's a combination of an understanding of which business models work and don't work, which things you don't need to do until later in order to get to scale quicker, which risks you can take as an acceptable kind of financial outcome and is trying to make it work for the customers, for your investors, for the employees, and making that all work. And it was a set of these things, which is, of course, an evolving practice. And so I was like, all right, well, we should really kind of get this out there. Like Reid just said there, you know, Silicon Valley is such a small area. I would be surprised is I'm the only person who is like, how can an area that is so small, come up with so many

Starting point is 00:03:56 incredible, so much incredible innovation, so many great businesses? Like, how is that even possible. I was reflecting upon this and wanted to give my two cents, but instead I found this paragraph by Bill Gates, where he's giving his two cents on the secret of Silicon Valley, which I found really insightful. Because what he's talking about in addition to Reed Hoffman here is that the secret of Silicon Valley is the rich ecosystem of service providers and outsourcing companies to support rapid growth. So many companies have gone through their own growth spurts, so there are are a lot of examples and best practices to learn from. And he points out that with the feedback loop that you have in Silicon Valley, there's just this constant stream of data that has to do with

Starting point is 00:04:44 your product cycles. It has dropped from yearly to weekly or even daily cycles. So Silicon Valley, it's not just because they're smarter. It's just as much because they try more things faster. So in many ways, it's a numbers game. I know that we're supposed to talk about Ree Hoffman. And I just wanted to add to that here, really to get a better understanding of why is it that in an area with only 4 million people, that's the population, that's not people, you know, working in the tech industry. Why can they come up with so many incredible inventions? So my only comment on this is just, I mean, it's just sucking all the talent from anywhere in the country out to Silicon Valley, mostly because I think you have MBA students,

Starting point is 00:05:24 you have undergrads that hear the stories of young entrepreneurs going out to the Valley, hitting it big. They also see companies like Apple and you name it with very high market capitalizations. And they know that the salaries out there are very high. I think a lot of college students miscalculate the cost of living whenever they hear the salary out in Silicon Valley is $150,000 or whatever it might be and that they don't realize what their cost of living is going to be and that maybe they're actually taking a pay cut by going out there. But I think a lot of that is just the momentum of taking very, very smart and talented people and placing them out there, and then the culture itself just kind of takes over once they arrive. Yeah, and whenever we talk about

Starting point is 00:06:10 technology, whenever we talk about, you know, clusters of innovation, it seems like Silicon Valley is the protocol. But that's not how that's shared across the world. Now, I was reading this book by Kai Fu Lee, and his name is called AI Superpowers. And he talks about how the power of Silicon Valley is such that you're helping each other. You're helping each other. You're helping each other in so many ways. You're even helping your employees getting new jobs. You're creating really good working conditions for them and really the power of that. And when he talks about, that's not how it is all around the globe. You don't have that ecosystem of just like the networking effects. The companies, even though they might be competing with each other, they're making

Starting point is 00:06:49 each other better. They're not copying each other. They're helping each other. They're helping each other to make each other better. And for me, that was very profound. It might sound very logic whenever you hear someone who's been to Stanford, who would be working at Google, then he'd be working in Facebook, then who's working at Apple. That's not necessarily what's going on the rest of the world. So really the strengths of the ecosystem is something I found really insightful here for this question. Yeah. And I mean, the culture is definitely taken over at this point. There's a culture out there that's breeding this type of environment. All right, so we're going to go on to the next question. And in this question, Reed was asked for successful companies in Silicon Valley, you talk about

Starting point is 00:07:24 a concept you refer to as blitzscaling. Please explain the concept. concept and give an example of a company that's blitz scaled. And here's his response. There's three kinds of scale that you look at in business. You look at customer scale, revenue scale, organizational scale. Part of how you look at kind of these modern businesses is you want high customer and revenue scale per employee as part of kind of how these businesses work and have highly leveraged kind of global presence. But actually, in fact, all of them end up having a high organization scale too because you need customer service. You need salespeople. You end up moving from single-threaded organizations to multi-threaded organizations.

Starting point is 00:08:00 So you're working on a number of different products. You end up making your services much more robust. And so what we did is we said, all right, let's take the organizational scale as the fundamental foundation, even though you're targeting customer and revenue scale and frequent of course in blitzscaling, you're targeting customer scale first with later figuring out revenue scale. And let's look at kind of what are the patterns that move. And we roughly went kind of orders of magnitude. So you start with kind of the folks in a garage. That's a family that's order of magnitude ones, five people, ten people. Then you move to Tribus Tens peoples. Like so 15, 20, 30, 40, village, hundreds, cities, thousands, nations, 10,000s.

Starting point is 00:08:39 And you go through these different levels of order of magnitude of employees. And what you realize when you begin to look at that is that things change radically as you go through these different levels. And even though frequently what happens with blitzscaling companies is they will double in size in three months or six months, which is an enormously kind of chaotic kind of a situation. They will actually, in fact, what changes is everything from how you recruit, how you onboard, what does management look like, what is communication within the company look like, are you single-threaded or multi-threaded in terms of what you're doing, are you formal or informal, the slider on your operational processes as a company? All of these things change, and part of the

Starting point is 00:09:15 reason you need to do that is in blitzscaling, you're doing it really quickly. So you need to be able to kind of make those shifts at some speed doing that. Year tends to to be even more than, you know, they sometimes say internet years or dog years. So it's 7x. Sometimes it even feels like more than that when you're blitzscaling. But maybe to go back to the early days of PayPal, when we started, we launched the product. It was kind of, I think it was the November of 1999. We started picking up some traction in December with kind of growing on eBay and really started growing in January. And in between, Jim, January and September, we, for a large swaths of weeks, we were growing at two to five percent

Starting point is 00:10:05 compounding per day in terms of customers, people using the service and similar in terms of transaction volume. We move from, hey, there were 25 of us in an office to there were hundreds of us by September. We moved from a manageable burn rate to, I think, in August. we burned $12 million in one month. And I told Peter that if we were standing on the roof, the building, throwing wads of $100 bills over as fast as we could, we wouldn't have spent money as fast as we were doing then.

Starting point is 00:10:39 And so those are the kinds of things that are the attributes of doing this. And meanwhile, we're trying to figure out a business model. Because in January and February, we thought we didn't have to figure out a business model, someone to acquire us and weld on a business model. Then we decided in March we weren't going to get acquired and we're going to be a bank. and then by April, May, we decided that being a bank wasn't going to work and that we should

Starting point is 00:11:00 reverse the process that we'd been talking to going to bankers. And in August, we've kind of thought, well, gosh, we have one chance to get a business model. We should go figure it out. And in September, we took an offsite, Peter Max, Luke Nozik and I, and we figured out we should be a master merchant and a payment service. And we came back and did that. Man, what an incredible story. I loved there whenever he said, yeah.

Starting point is 00:11:22 And then we thought we should probably come up with a business model. I about died when I heard that. I like that. I would really like to talk about business models here and talk about how different that is for a company that's being blitzscaled or whatever you want to call. It's something that's growing really, really fast. Apparently so fast that you can just stand out the roof of a building and just throw

Starting point is 00:11:44 out $100 bills and it won't even burn as fast as the burn rate of your company. The business model of something that blitzscaled is really unique because you need to reach a tipping point before you start having these major margins. One example that comes to mind is something like Google AdWords. They're making so much money, Google, on something that has close to zero marginal costs. So for every extra dollar they make on their advertising, they don't have a lot of cost associated to that. The interesting thing is that they had to invest a ton of money, burn through a lot of cash before they went to this point in time where they can just scale. The key for them was just to have everyone on Google.

Starting point is 00:12:23 And then when everyone was on Google, it was very, very expensive to get people to do, then they could make money out of something like AdWords. You know, you can mention something like PayPal again, where Reid Hoffman was the CEO. They also have very little cost in terms of people transferring money to each other. So for them, it was also, again, about reaching that critical mass or that tipping point where there was enough people on the network. So now they could start sending money to each other. And I think today they have close to 280 million active users or something like that.

Starting point is 00:12:54 So it has become extremely extremely successful. It's all automized and it's all very convenient to use. And the last thing I just wanted to add here about blitzscaling is in a way it's also a competitive advantage because if you have to compete with someone like PayPal or to compete with someone like Google, you have to be willing to burn a lot of cash and handle that growth, which is very difficult in itself. before you can compete in the same market space. I agree with your last point there.

Starting point is 00:13:22 That's where I think a lot of this is coming from is just a race to protect or create a competitive advantage and get a network effect before anyone else can. And I think the advent of the internet and the connectivity of the world in the last 20 years has really kind of created this business model that if you're going to do something in tech, you've got to move out at a pace that is so breakneck that no one can even attempt to keep up with you or sustain what you're doing. You know, you look at what Reed was describing there. Not many people can lead an organization through that kind of breakneck speed and keep it all together because you're maybe hiring too fast or you're creating some type of

Starting point is 00:14:05 cultural dynamic because you're hiring so quickly that you create a cancer within your organization and you don't have the ability to establish that culture and those protocols that you read about and books like good to great, that you just can't establish these things because of the speed at which you're going. And then I think the other thing that's rarely talked about, the ability to continue to do VC round after VC round and continue to sell investors on whatever it is that you're doing. So like for him saying, we didn't even have a business model, but they got breakneck growth on users, you've got to sell that narrative to a VC and convince them that there is some type of way to make money on this. And what is that valuation? And so a person who is truly gifted

Starting point is 00:14:51 in doing that is wearing all of these hats. I just don't think that that's something that too many people out there really have a knack for. I mean, when he was describing that year there at the end, I mean, that sounds like stress to a degree that you can't even imagine. My final point is this. if you haven't read this book Bad Blood, this is about Elizabeth Holmes and Theranos that went bankrupt. And I mean, it is just a perfect example of when you're blitzscaling and you have somebody who's unethical at the helm, it shows you how badly and poorly things can go. Because it's this exact blitzscaling model that Reid Hoffman is explaining. But it's with a person who's leading that charge who has very questionable. ethics, just downright, dishonest and the implications that kind of fall out. It's just an incredible,

Starting point is 00:15:45 absolutely incredible book that I think any young entrepreneur should read. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history.

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Starting point is 00:19:41 Sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com. W.S.B. All right. Back to the show. For the next question, Reed was asked, what are the best practices of networking? And how do you use networking to find new job opportunities? And this is how he responded. Kind of the foundation of LinkedIn is the insight that every individual, whether a student or Bill Gates, having a public professional identity that helps you navigate your world to work. What you're particularly seeking to do is extremely helpful. And it's helpful both on an

Starting point is 00:20:28 inbound basis because one of the truths of a living and working in the networked age is that you have to have a strategy for how you're found and then how the right signal gets through to you and being found because there are millions of people out there. So you have to think each CPU processor, each agent, each person, how do you get found by the right person, the right people, and how do you do business with them. And then also, how do you find the right people? How do you find expertise? How do you find business opportunities? How do you find jobs? How do you find how to invest in yourself? And both of those are through the network as a fabric, as a foundation. And so I realized my time at Social Net, talking to Peter and Max PayPal, that this would be the one of the

Starting point is 00:21:15 fundamental ways to transform people's lives is to enrich their economic opportunity, to enrich their ability to either work, to start companies, to navigate whatever economic life is important to them. Even today, most people come to LinkedIn don't really realize how strong the tools are because most people when they think I look for work, they go, we have job listings on LinkedIn. They go and look at the job listings. It's a perfectly valid thing to do. But the really interesting thing is to say, well, who do you know who is in our language of LinkedIn, two degrees away from you who can help give you guidance, who can say, well, this company is a good place to work or this opportunity here. I mean, it goes all the way back to my work, my business career started

Starting point is 00:21:57 with a call to a Stanford friend whose roommate was working at Apple. How do you discover those opportunities? Well, that all comes from your network. And so even today, with, you know, well over 300 million people in LinkedIn, people still have, most people have yet to learn how to use their network. I think he's spot on whenever he talks about the misperception about networking. And I know that he's also here sitting here promoting his own company. That's not what I'm, I'm not blind to that. But I think he's right that if you approach LinkedIn and LinkedIn could be your, you know, a metaphor if it's just networking in general, with the attitude of give me a job, please. You'll probably not be successful. And even if you get a job that way, there's a good chance

Starting point is 00:22:43 it's a wrong one. I think that looking at job listings and that being your go-to place might have been a good way to do that a few decades ago. But I think the best fits is really what will come from your network. Someone who knows you and think you would be a good fit, not just for the job description, more from a cultural perspective, which I deem even more important to really reveal your true potential. I think it's important to realize that networking is in essence about making yourself and your network smarter. And typically, I'd say that what you give is what you get. If you help a person in your network, you know, a second link, say it could be me helping one of Preston's friends. I know it might sound out there, but it does work like magic. You do get it back. Not necessarily

Starting point is 00:23:32 from Preston and from Preston's friend, but in aggregate, I think you get multiples of what you send out. I'm also saying this as an avid user of LinkedIn. I actually go onto LinkedIn every single day. I absolutely love the networking aspect of that. And it's not to give anyone a job or it's not to ask for a job. That's not why I'm doing it. It's really to invest in myself and give back to my network. So just a few examples here. I have really smart people in my network who share as valuable resources. That's something I'm interested in and you know, I can engage with that content. I also have a few examples. I have. a lot of communication with people on LinkedIn. But again, this could be another place. I think that is so powerful because you have this description of the person that you're speaking to because it's

Starting point is 00:24:18 not just one link out. It might be two links out. So you're not too familiar with that person, but you already have his resume. So you have a really good starting point. I also just want to say for the record, Reid Hoffman is not paying me to say this. But I am a huge fan of LinkedIn. But also because I travel a lot. I might travel, I don't know, eight times a year. 10 times here. I always use LinkedIn whenever I come to a new city, a new country to locate my network there and really to see who is there, who can I do business with, who can I learn from. You know, not too long ago went to a live event in New York that we had for the listeners of TAP and I met up with a young entrepreneur and I was lucky enough to help him with a few things.

Starting point is 00:25:00 And he actually told me that he reached out to me a few times before and apparently I've just said know whenever you did that. But whenever you meet people in person, which is really, the very first steps comes on something like LinkedIn or network in general. But whenever you meet someone in person, there's just a different connection. You sometimes need someone, something to facilitate that, meet up one way or the other, to meet up with the right people. And that's why I'm such a big fan of that. So I just wanted to put that out there. You don't have to use LinkedIn. You don't have to use the network the same way as I'm doing. If there's one key takeaway, I think you can take from this discussion and what Reed Hoffman said is that you can't change your job every four years or whatnot.

Starting point is 00:25:41 And then that's the only time you want to help other people. And that's whenever you count on your network to fix your job situation for you. It's really the other way around. So one of the things that's interesting with Reid Hoffman is he obviously founded a social network with LinkedIn. And you go back in time and Reid Hoffman was the co-founder of a company called socialnet.com. This is back in 1997. I focused on. on online dating and matching up people with similar interests. So like if you were a golfer and you wanted to find other people in the neighborhood who were golfers, you could use socialnet.com to do that.

Starting point is 00:26:15 And so his next question that we're going to play here that he was asked was a question where he talked about what he learned from starting this company back in 1997. So here it goes. SocialNet basically returned its capital to its investors, but didn't actually do very well. And there were key problems. The first one was financing strategy is central. So in 1997 to 1998, and we raised our second round in late 1998, all of our competitors were going to the market and saying, we're going to build these free websites, they're going to have the whole world on them, and you should give us $40 million to go do that.

Starting point is 00:26:50 We were going to the market saying, well, we think subscription dating is one of the real places where you can make money on the Internet, and you should give us $5 million, because we're going to kind of just, you know, make a subscription web service and make it happen. And in our business model, we think, is really sound. And the business model is sound, if you look at Match.com, any harmony and a bunch of other things now. But the problem was it was a wrong strategy at the time. Strategy of the time was, everyone else was raising $40, 50 million, and was going in advertising and buying deals and everything else for that money. And we were sitting here trying to make our little business model work, which in that financing climate was a dumb strategy. Your strategy has to reflect what your financeability is.

Starting point is 00:27:30 And the one error, our error, which is an unusual one, is very frothy capital markets, all your competitors are going to be well capitalized, and if you undercapitalized relative to your competitors, you're screwed. The other one, of course, is can you actually raise money for this at all? Because if you can't raise money for it, you're not attentive to what the financing market looks like for what you're doing, then you may also die because you have inadequate financing. Second thing I learned, right, and this is a very basic on consumer Internet is it's frequently set of retail that there are three words, location, location, location.

Starting point is 00:27:58 And consumer internet, it's distribution, distribution, distribution. And matter of fact, one of the ways that when I'm talking to panels and stuff about entrepreneurship and consumer internet is value of what you've built without distribution, approximate value zero. You do not get distribution, values zero. Technology is not valuable, team's not valuable, it doesn't matter. If you haven't acquired a whole bunch of users through generally natural organic means, virality is one, most people use the word not knowing what it means, viral distribution

Starting point is 00:28:25 is one, there are other forms of distribution that are natural and organic that work. Then your value is zero. And we had, when I didn't had done social net, I hadn't realized because when you work at, like Apple and Fujitsu, you work at these places which have big channels of customers already. I hadn't realized that distribution strategy was central. Like, that's the very first thing you worry about, especially in consumer internet. I thoroughly liked that clip. And I think that the reason why that clip is so powerful is because when he was saying those

Starting point is 00:28:56 things. It was at a time way back before he became kind of really, really famous like he is now. I mean, just some real nuggets there about the whole VC comment that he wasn't asking for enough money because he wasn't reading the environment at the time correctly. His competitors were going out and raising 10x what he was and he just didn't have the ability to compete because he wasn't informed enough to know that he should have been asking for more money. Those kind of things are just incredible. His comment about attracting users and having a user base being central to a service-based online business is something that so many people don't understand. They'll go out and start a blog or they'll try to replicate maybe something else that they're seeing and they

Starting point is 00:29:43 don't realize that without any type of user community, you're just dead on arrival. You can have the best program in the world, but if you don't have the traffic to bring to that business, you're just dead on arrival. And let me tell you, that is a very, very insanely difficult thing to do. I know with our own business, attracting users and for us, it'd be listeners that listen to the show is not an easy task. It is something that is incredibly hard and difficult to do. So to hear Reed kind of hit these points, it's just kind of refreshing to hear how important some of these ideas are. And it's something that I think a lot of people don't necessarily know unless they have somebody like him that says of those things.

Starting point is 00:30:23 If I could mention one more component of something that Reed Hoffman did wrong with SocialNet.com back in the late 90s is that perhaps he was just ahead of his time. Like you can see the success of social networks later. I mean, perhaps it was just, the internet was just too new. We were just not there. It was definitely the future. And I think his own company LinkedIn would be a great example of that. But no, he was probably just too early there.

Starting point is 00:30:48 I just wanted to piggyback on some of the things that you and really, talked about in terms of the distribution piece. I think he even also mentioned, you know, it's like location, location, location, whenever we're talking about real estate. You know, if you have the right distribution, it's like having your real estate in Manhattan. You know, if you have the worst real estate on Manhattan, it doesn't matter too much because the location is just so important you can build something else on it because it's so valuable in itself. I think it's interesting that throughout this episode, whenever Reid Hoffman has talked about business, he's more or less not talked about the business model, or he doesn't talk about the product.

Starting point is 00:31:26 That's not important as much as everything that's around it. I think that's a common misperception among entrepreneurs and also employed people that as long as the product or service is really, really good, the rest will follow. I think that's completely wrong, and I think that's also what he's getting at here. If you have the distribution right, then everything else will follow. Because you can mess up a lot of different things if you have the distribution right and you can get out to the people. I don't know that I agree with that.

Starting point is 00:31:55 I think first and foremost, you have to have the product and the service right, period. You know, if there's not a reason for somebody to praise it in a review, it is not a long-term strategy. It's not something that's going to last long-term. Once you have that product or service right, because that's what's adding value to the end user, that's what's adding value to the end user. Once that's established and once that's there, without a distribution strategy, without all the other things that support the growth of that product or service, it's just dead. And I think that that's where you see a lot of entrepreneurs kind of make their mistake

Starting point is 00:32:30 is they might have the distribution perfect. And then the product stinks. So then they sell a bunch of it up front. But in the end, it ends up failing because it's not actually adding value to the end user. So it's a short-term strategy. So I think in order for a business to have a long-term strategy, the product and the service actually has to add value, period. It has to be, let me give you an example.

Starting point is 00:32:52 You write a book and the book stinks, but you have one heck of a marketing strategy and you're putting it in the hands of all these celebrities and everyone's raving. You're going to sell a ton of books when the book launches. But in the end, a year to three years later, you're going to stop selling that book because the reviews of whether it's value ad are going to be posted on whatever website and then people are not going to buy that book anymore. So, and I don't know if that's the point you were saying that one's more important than the other. I don't think that's what the point you were making. I think you were just basically saying that you got to have all these things in

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Starting point is 00:36:53 All right. Back to the show. Before you think too long about the product that you're creating, you think about the distribution, building up the distribution if you can for yourself or figure out how to distribute it because if you can't do it. that, it's going to be very, very difficult for you. And it's also in the mindset of you can pivot multiple times. You can do so many different things, but it's very difficult to do that if you don't have the distribution. Say that you build up a big online community, for instance. If you have

Starting point is 00:37:21 the community, you can do many different things. You can fail multiple times with different products as long as you have the distribution. I'm not saying you should send out bad products in the hands of the consumers. You can come up with a filter that's better than what you can find on Instagram. more people would use the inferior Instagram filter because, hey, it's on Instagram already. That's an important factor to include. I don't know if we're speaking about the same thing or not. No, I think we are talking about the same thing. And I think that there's some truth to what you're saying because I'm not going to say any names here, but you see some people on the internet that obviously have a huge following. And I would argue that whatever the product or services that they're selling

Starting point is 00:38:01 is not necessarily the best, but yet they continue to be able to do what they're doing because of the distribution that you're talking about. My opinion early on would have been that your goodwill and your brand is eventually going to destroy that distribution that you have in place. But maybe there's a little bit of truth to what you're saying. And maybe there's really kind of situational dependent where sometimes like what I was just described, it can continue to float and continue to happen. Whereas in other types of businesses, it won't last because of the brand and the goodwill that's kind of established over time.

Starting point is 00:38:38 But very interesting discussion. And I think that, you know, if I was going to guess, I think it can only exist on the Internet. I don't know that you could, I guess from a brick and mortar standpoint, it'd be a little harder. It'd have to be a flow of traffic that is not unique to the local area that would continue to populate a business simply because the traffic's going through. And I'm sure people have seen brick and mortar businesses like this, like tourist trap kind of things. Now, I'm not the big coffee drinker, but I do drink other things than coffee whenever I go to Starbucks. Starbucks is not the place in the world where you have the best tea or where you have the best cappuccino or like, you bite your tongue.

Starting point is 00:39:15 Yeah, I know, I know, I know. They launched so many different drinks over the year that has not been good. But it's still immensely popular because they have the distribution. And I'm a big fan of Starbucks, by the way. Don't get me wrong what I'm saying this. I do think that, I don't know. Anyways, I guess there was just like one more comment to that, but a very interesting discussion. And, you know, if any other listeners have anything you want to add to this discussion,

Starting point is 00:39:40 you know, who goes up on Twitter? We love to discuss business with any of our listeners. So go ahead, guys. I don't drink coffee. No, no. So this is the point in the show where we play a question from our audience. And this question comes from Alistair. Hi, President.

Starting point is 00:39:56 Dig. Thanks for a great show. It seems as though the best investment return. have been earned recently by people investing in unlisted securities, with returns on stock market listed investments being disappointing by comparison. So my question is, how do we apply the principles of value-based investing to early stage unlisted securities, many of which are growing fast, but don't look good on conventional cash flow metrics? So, Alistair, that's a pretty difficult question because it really depends on which industry you're talking about. It could depend on a lot of

Starting point is 00:40:30 other factors, but what you're really talking about is private equity here. Some of it is just pure competition. When you have less participants bidding up the price of something, that can create value. When you're talking about risks associated with investing in a company that maybe doesn't have these characteristics that you're talking about of a standard value-based investment, Some of it is just institutional knowledge, like a Reed Hoffman, seeing a business and being able to invest in a business. Then I'm not calling everybody that's in that space a Reed Hoffman, but people who have invested in that space for a long period of time kind of know what to look for because they've done it one or two times previously. And some of it might just be, because I don't know the statistics on this, some of it might just be perception that there's better returns in these spaces without actually knowing that they in fact are. from the friends that I have in private equity, they tell me that the discount rates that they are

Starting point is 00:41:26 using are definitely higher than what you're seeing in the public markets. It's a very timely question now that we're doing this episode about Reed Hoffman. Think back on the question about PayPal. How would you value PayPal whenever they pivot three or four times during nine months? How are you going to value that? You probably don't want to do that. It definitely not by conventional metrics. One other thing that the president was talking about there is, is typically referred to

Starting point is 00:41:55 as survivorship bias. You might think back on companies like Facebook, you know, company like Square right now, which is very relevant. You know, they, oh, my God, they've been making tremendous returns to their investors. You know, there's been so many companies who have tried to make payments easier and failed. We look at Square now and we look at those who invested in Square back then. They have made so much money. But it's very, very difficult.

Starting point is 00:42:17 and you do see the survivors and not all those fails. The underlying principle of what we're talking about here on the show is that you can foresee with somewhat reasonable accuracy what the future will bring. If you can't do that, you can't make this discounting on the expected of future cash flows because, well, you don't know what to expect. So you can't really make an assessment of the value. If we take a company like Facebook as an example,

Starting point is 00:42:42 if you look at their year-over-year growth in the early years, one year, 2,150% growth. The following year, 433% growth, and then 219% growth. So they're going from very little to 153 million in revenue in 2007. I mean, how are you going to value that? The other side of the kind is also that Preston was talking about your discount rates of north of 7% or 8% or whatnot. Depending on where you are in the states of these companies,

Starting point is 00:43:14 you have to use really, really high discount rate. You know, if you're talking about companies that would either, you know, grow by 500% or fail because they're just burning cash, I wouldn't know what type of discount rate I would use at all. I would like to say a few things about venture capital here because, yes, we're doing this episode about, you know, Reed Hoffman. We've done bunch of episodes before about, you know, Silicon Valley and venture capital. And for me, it's very glamorous and it's very exciting. I would also like to bash venture capital a little here.

Starting point is 00:43:44 And say, yes, it is important for society that you have risks even capital. Yes, you know, it's a very important role to fill out. And venture capital should have all the praise for that. You know, whenever you go to the bank and they say, you know, you can't do that because you don't have a proven business model, that's whenever you have Silicon Valley and venture capital. Because by definition, if you have blitzkilling companies, they don't not have a proven business model.

Starting point is 00:44:10 I think the issue that I have with some of these tycoons and everything that's that's around it is that they're looking at funding as the means to exit the company, typically in the shape of an IPO or a takeover for someone else. But why is it that all these VC companies want IPOs for their investments? You know, you can argue, you know, good arguments that, you know, it's the fund structure and they have to pay back their investors. They have to diversify. You know, there are many good reasons why they're selling. But keep in mind, whenever the public has access to whatever kind of security there is, it's Silicon Valley that's selling it. And they're very, very aggressive in the way that they say, you know,

Starting point is 00:44:51 this famous investor, Reid Hoffman, Peter Thiel, whoever, he invested in it. He has that, you know, approval stamp on it or, you know, this IPO company, they would take over the world. Like, you should buy into it. And you might be thinking that sounds like a great business thesis. Also keep in mind, I mean, they're selling a product. They're basically saying, please take it of my hands. They are all the good reasons why you should buy it, but I'm actually selling it. I'm not going to own it anymore. I have to piggyback on this because it goes back to the book recommendation I had earlier

Starting point is 00:45:22 in the show, which is this book called Bad Blood. And one of the things that was really fascinating with the demise of this company was the amount of venture capital that kept being thrown at this company. Real fast, so Theranos, the company, they were trying to take blood samples in wherever location and then this device, this piece of hardware at whatever remote location. So if you were at a safe way, you could go in and you could have a small blood sample taken and they'd put it in this machine. And then this machine supposedly could conduct the lab result on station right there. And it'd be all done through the mechanical machine instead of sending it out to a lab for a couple days and then the

Starting point is 00:46:04 results coming back. Well, the technology was a total farce. The machine was supposed to be able to do hundreds of different lab tests, but it actually couldn't. Going to Stig's point, they had BCs that kept throwing more and more money at it. And from what I could gather from the book, it seemed like the reason it kept getting more and more money is because people would say, oh, well, so and so, they made a really big investment in this company. So, you know, this thing's going to change the world. And so then people would immediately have a bias to there being a research. being conducted by that really talented venture capitalists or that other venture capitalist firm. And so that was outsourced. The knowledge and the understanding of this very complex and

Starting point is 00:46:53 technically challenging business to understand was just outsourced. And the narrative was quickly derived that, oh, well, you know, if so-and-so invested in the technology must be gold. And it wasn't. It was all a falsehood. But it just shows you how the snowballing of some of these VC money can be built in brands of other investors. Just some really interesting things to think about, especially if somebody's, maybe you recently had a windfall and you're trying to step into the VC space. Be very careful of that. This book is so good. I'm just going to leave it there. The other thing I'd just like to say is for public listed companies, which is really like where Preston and I, you know, the things that we talk about, whenever we talk about security, is typically

Starting point is 00:47:37 something that's public. Just keep that in mind, you know, it's public. That's actually. the important thing. It sounds very boring and it probably is. It's not as exotic as Uber or Square or Airbnb, but you know, because it's public, it's also transparent. You know, it's not this machine that even if it was public, I don't think anyone can understand what actually did. Everything is transparent and has to be transparent. Yes, that also means that your potential upside is probably not going to be as high if it's public, but your downside, you know, don't lose money. It's a lot more limited too. I think that's something I want to put out there. And I don't know, Alistair, if you really answered your question other than you probably won't. You probably won't be using the tools that we have in the formulas to access the value of security. I think that should also tell you something. If you can't value it, don't buy it. All right. So, Alistair, fantastic question. We were just so appreciative of this. Sorry we took so long to respond to. And I think we covered some things that were probably outside of the scope of your question in the first place. But as a token of our appreciation,

Starting point is 00:48:38 for leaving your question. We're going to give you access to one of our free courses on the TIP Academy page on our website. The course that we're going to give you is our intrinsic value course. And our intrinsic value course teaches people how to determine the value of an individual stock. It also teaches you how to think about the market cycle and when you're buying your stock. And it also teaches you some stuff about options trading. So we're really excited to give you this course. If anybody else out there wants to check out the course, you can go to tip intrinsic value.com. or you can just go to our website and click on Academy, link at the top of the page and courses right there.

Starting point is 00:49:13 So if anyone else wants to leave a question on the show, go to Ask the Investors.com. And if your question gets played on the show, you'll get a free course. All right, guys, that was all the Preston and I had for this week's episode of The Investors Podcast. You see Chile again next week. Thanks for listening to TIP.

Starting point is 00:49:29 To access the show notes, courses, or forums, go to the Investorspodcast.com. To get your questions played on the show, go to AskTheInvesters.com and win a free subscription to any of our courses on TIP Academy. This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - Classic 19: Billionaire Reid Hoffman Lessons Learned

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