Shawn Flynn  01:32
Now, Steve, you’ve had an amazing background. Can you give us a little history up to this point in your career?

Steve Hoffman  01:38
My history is very unpredictable. So I began life thinking I would be an artist, a painter, because my mom is a painter. But my dad is an engineer from MIT, and he told me, “Steve, you have to study computers.” So I went off to college, taking his advice and studied computers, but as soon as I graduated, I decided I wanted to make movies. Because as a child, I had made over 50 movies from grade school all the way through high school. So I applied to film school, I got into USC film school. I was living my dream. I made a bunch of movies, little short movies. And then I went out to Hollywood, got a job in Hollywood, quickly rose up to a TV development executive. And then I quit. Because I saw at that time, that games were going to be bigger than movies. And I also love games. I love computer games, and I coded computer games. So I was one of these people who try to do everything. And I got an opportunity from one of the producers at the company to go to Japan, and work for the game company Sega at their height when their Sega Genesis was rocketing to the top. And so I took it. I went to Japan work there. And after a year, you know what I did? I quit. Because I decided I wanted to launch my own game company. I moved back to Silicon Valley, actually San Francisco, and I started my first company as an entrepreneur. And that’s what set me on the path where I am today.

Steve Hoffman  03:09
So I did a bunch of companies. Three of them were venture funded here in Silicon Valley. And after my third venture funded startup, all of my friends started to come to me and say, “Steve, Steve, help me. How do I raise money? How do I do a business plan?” So I began to give them advice over coffee. And then that grew, more and more people started to come to me. They all had very similar questions. So I ended up posting the questions on my blog, and I called the blog Founders Space, and Founders Space became the name of our company, our incubator and accelerator. We first started doing Founders Space round tables where we invited investors, lawyers, marketing people, and entrepreneurs around the table. Then we opened up our own space in San Francisco and now we have spaces all around the world. And I am continually traveling and working with entrepreneurs globally.

Shawn Flynn  04:05
These companies that you’re working with, these entrepreneurs around the world, can you tell a little bit of the difference between entrepreneurs maybe in Australia, China and here? What have you discovered on your journeys?

Steve Hoffman  04:18
Entrepreneurs are different everywhere. And a lot of people are rooted in their culture, you can’t escape your environment. So in Silicon Valley, what’s beautiful about Silicon Valley is there is no stereotype for an entrepreneur. Because half the entrepreneurs here were born overseas. You know, half the successful startups in Silicon Valley have overseas founders. So when you come to Silicon Valley, you see entrepreneurs from everywhere— from India, from Africa, from Asia, from Europe, and they’re all here. When you’re in other countries, you really start to notice the differences.

Steve Hoffman  04:55
So I would say in Silicon Valley, the people who come here are self-selecting. They are already highly competitive, highly driven. And they want to succeed, otherwise they would have not have relocated to Silicon Valley to do that. And even in Silicon Valley, a lot of the entrepreneurs are from all across the United States or Canada or places like that. Very few people were actually born in Silicon Valley. In fact, when I go to a meeting in Silicon Valley here, I say, “Who’s from California?” And I’m usually the only person to raise my hand. So I know you’re from Berkeley, but we’re the exception, not the rule.

Steve Hoffman  05:29
When I go abroad, I see entrepreneurs in China, in particular, are extremely driven. There is a certain mentality that, you know, China in the past 50 years came up from extreme poverty into, you know, relative luxury. Some people have huge amounts of money, but people had to work really hard and that work ethic is ingrained in everyone. If you don’t compete in China, you get left behind. It’s sort of like no mercy. So people in China work like you go to Beijing… And I’ve been in Beijing with entrepreneurs. And I’m like, it’s 10 o’clock, I think I’ll head back to my hotel. They’re like, “10 o’clock? Well, we got to go to a meeting.” And they’re having like a meeting at 11 at night. So they work endless hours, and weekends aren’t even weekends. And if you work for a startup in Beijing, in China, in general, they have what’s called 9/9/6. You know, work from 9am to 9pm, six days a week. Well, those 9/9/6 is for average workers, not for entrepreneurs. If you’re an entrepreneur, it might be 8/11/7, you are working all the time. And I know a lot of people who work in startups who burn out. I mean, it’s just so intense that you barely have time to get home and shower and shop. There’s almost no time for any free time.

Steve Hoffman  06:48
In other countries, it’s very different. The other extreme is probably Europe. Now in Europe, people are very smart, very thoughtful. They’re very creative, but they don’t have that same driving work ethic that you would see in Asia, the sort of manic work ethic, which isn’t really healthy to work that hard. So in Europe, they’re much, I would say, much more rational. They take a month off during August for holidays, you know, they don’t work super late at night, unless there’s a really strong reason. So in Europe, they don’t feel that same pressure. And of course, I’m generalizing, you asked me a question where I’m forced to generalize. So there are exceptions to all these rules in every country. But in Europe, especially when European entrepreneurs come here, and I work with a lot of them, I mentor them and help them raise capital. A lot of times, I will look at them and I’ll say, “Don’t you feel urgency? You’ve been working on this product for a year and a half. Don’t you want to get it out?” “No. We have time, we have time.” You know, in Silicon Valley, we’re like paranoid. We’re like, “We have to get this product out next week because somebody is copying us.” In China, they’re paranoid.

Steve Hoffman  07:49
You go to countries like Japan and Korea. So Japan has fallen behind on entrepreneurs. I mean, really a lot of Japanese, they just take the comfortable corporate job. In Korea, they’re really pushing hard for entrepreneurialism. In Korea, they work very hard. In fact, the Koreans work the longest hours of anybody in the world. But they actually did a study in Korea and they found out the Koreans were one of the most inefficient people in the world. So these people in these huge companies like Samsung, and you name it are staying incredibly long hours in these big companies, but they are just killing time. They’re just waiting for their boss to come home so they can go home.

Steve Hoffman  08:31
So if you look at Koreans, they will also work like the Chinese extremely hard. But at the end of the day, and I say this in China too, productivity is what matters most. It’s not how hard you work. It’s not the number of hours, it’s the results you produce. And I actually think pushing the hours too far out, unless you’re an exceptional individual, and you can stay alert and productive for those long hours without any breaks… Most people, their productivity starts to decline dramatically after eight hours, and they’re just not being productive. So I promote actually greater flexibility. So you look at around the world, and a lot of people say, “Oh, Americans are more innovative, we’re more creative.” And I think some of that comes from our culture too. In the American culture, we are an individualistic culture, we believe that we should follow our own belief. Now, of course, every culture has a group mentality too. But in all of Asia, China, Japan, Korea, it’s much more group focused. You define yourself by your group, and going against the group is something most people do not want to do. So you get a lot of weird and wacky ideas here where the group will say, “That’s crazy. Give it up. Don’t even you know, who would ever want that?” And the entrepreneurs are still going and doing it. They want it and they want to see it happen and they don’t care. That’s one thing that defines our culture.

Steve Hoffman  09:58
In all of the world, we like to say Chinese copy, right? We used to say Japanese copy, and then Koreans copy and now Chinese copy. But the fact is, if you’re in Silicon Valley, everybody copies most of the products that were hits like Facebook, that was a copy of Myspace and Friendster. Most of the products are only partially innovative. So I don’t think the Chinese necessarily copy more. I think they copy because it works. When they see something working over in Silicon Valley, and they can bring it into the Chinese market first, they know they have a big win. And it didn’t require all the trial and error that innovation does. And so naturally, what we’re seeing now in China, and in other countries as they become more innovative, just like in Japan, they’re pushing the limits. So all of these startup communities and entrepreneur communities are always innovating and they’re always copying.

Shawn Flynn  10:47
The startup communities around the world, they try to at least it seems kind of mimic copy Silicon Valley. What advice would you have for them to actually bring Silicon Valley to their locations? Or is it even possible?

Steve Hoffman  11:01
It’s funny you say that because when I started Founders Space, our mission was to bring entrepreneurs from all over the world to Silicon Valley. But then we saw an opportunity. We met so many people from all over the world who said, “Can’t you bring Silicon Valley to us? We want Silicon Valley to you.” And since we were already established here, we had all these relationships from all over the world. Our mission became to bring Silicon Valley to the rest of the world. So I meet with Prime Ministers, I meet with mayors, I meet with governors all over the world and they’re always asking me this question, “How do we replicate Silicon Valley here?” And the answer is, Silicon Valley’s very unique. Like I said, the thing that makes Silicon Valley so amazing are things you can’t export, our culture, right? Our individualistic culture, the whole hippie culture, which Steve Jobs and Wozniak were a part of. The whole attraction were this magnet for people from all around the world in a very open system, right? We’re not a homogeneous society like China or Korea or Japan or many European countries, we are very open to immigrants from all over the world. Those things you cannot copy, you cannot replicate those in other places. So I tell entrepreneurial hubs and the people who want to develop a real hub for entrepreneurialism, “Look at the strengths of your region.”

Steve Hoffman  11:59
A great example is Estonia, which is right next to Latvia. Estonia became a huge hub of entrepreneurialism. And it’s a tiny country, like 2 million people. It’s really small. How did it become so dynamic? Well, after it left broke away from the Soviet Union, they totally reorganized the whole economy and how they do stuff. And the number one thing they did was they brought every city service and everything an entrepreneur would need online very early. Then they made an e-residency. So an e-residency means you can actually be a resident, start a business in Estonia without ever setting foot there. You can literally set up your whole company and everything involved in Estonia, get favorable tax treatment, and all the advantages of entering the European market without ever going there. Then they did a lot of other things. You know, they invested a lot in promoting, putting high speed internet, they have a lot of groups that promote entrepreneurship. They reached out to the rest of the world. They made favorable lending policies, all of these things come into play. It’s actually not one thing. It’s a lot of different legislation that the government has to put in place. The culture, what the culture is, what the natural resources are. I mean, resources in terms of talent, knowledge, resources, people that you can leverage, all of these coming together.

Shawn Flynn  11:59
Now you just mentioned Shenzhen and Latvia. Are there any other locations that you’re very bullish about for entrepreneurship?

Steve Hoffman  12:08
So if you take Shenzhen for example, why is Shenzhen the most dynamic city in China for entrepreneurs? Well, there are a couple reasons and they have nothing to do with Silicon Valley. Number one, Shenzhen is a brand new city. It was literally founded like 30-40 years ago. I don’t know the exact date, but it’s a new city. It grew out of nothing, which meant everybody in Shenzhen is new. So they all had to emigrate just like people come to Silicon Valley from all across China. So they got a lot of young people. It’s predominantly young. It’s a very young city with young people who move there for the opportunity. Again, self-selecting, very ambitious, very driven, willing to try new things. There wasn’t an established hierarchy, like there is in many cities. So the field was wide open. Another thing about Shenzhen is that the whole electronics supply chain and ecosystem for manufacturing electronics has evolved in Shenzhen, you know, cheap electronics.

So with Shenzhen, it naturally became an innovation hub, because they had this huge infrastructure where literally you can go out with an idea for a new gadget device electronics device, and within two to three weeks, you can have somebody manufacturing it for you. It’s incredibly fast, incredibly dynamic system. So in each place, I go, and I go to a lot of places, you know, we’ve set up our operations in Australia, we’ve had Founders Space in Singapore, I go to Malaysia, I go all around the world. I was just in Latvia, you know, working there advising the government. In fact, of Latvia, which is a very small country in Europe, on how to create their innovation ecosystem. And I was like, “There are a number of things you need. You need favorable policies that are implemented to actually attract and promote entrepreneurialism. You need to look at what your universities, what your research institutions are really good at. You need to leverage that talent pool. And a lot of times you need to push into new territory that isn’t already claimed. So you need to move into new technologies that aren’t already dominated by a certain region.” Would Latvia be able to compete with Shenzhen on manufacturing electronics? Never, right? So what are their strengths? What is their position in Europe?

Steve Hoffman  15:58
What am I bullish about? I’m bullish all over the world. What we see is that there are different entrepreneurial hubs everywhere. You know, Israel is a startup nation. And I work with a lot of Israeli entrepreneurs, startup founders. They are amazing for a country that is tiny. Israel’s another tiny country. They haven’t a huge oversized effect in the world when it comes to startups. And when I’m in China, now, I meet more Israelis in China than almost even in the US or anywhere else I go, because they see an opportunity to go there, get capital, enter that market, and they are always starting a company. So there’s a really deep culture in Israel of starting companies. And the other advantage Israel had was that number one, people there prize education, so they’re always reading and learning and that played a big role, since it’s a knowledge economy.

And number two, Israeli military trained people in computer science and security at a very high level. So a lot of them left. And Israel emergence as an entrepreneurial hub came from their unique strengths of having the security experts, the education, the culture, all these things made them explode. But you look around the world, Singapore now, Singapore is an entrepreneurial hub, especially for FinTech. So Singapore has invested heavily into putting in fiber optics, big bandwidth, promoting entrepreneurialism, that trade policies are very open there. They’re very open to setting up companies. They attract entrepreneurs from all over the world. And they see themselves as a gateway into Asia. And then you look at London, another FinTech hub. I’m looking around the world and Berlin right now is having a Renaissance. It’s a lot of creativity. Entrepreneurs are flocking there because it’s very open to new ideas, lots of incubators and accelerators. Wherever I go in the world, I’m seeing different hubs which is good. Silicon Valley is still kind of the center of the universe. But there’s a lot of constellations. There is a lot going on.

Shawn Flynn  18:02
So what do you look for in a successful startup? How do you know that maybe the idea of this team is going to go some place?

Steve Hoffman  18:10
I get pitched to all the time. So entrepreneurs come and pitch to me. And most of the ideas don’t work. And they don’t work for a lot of reasons. Most of the time, I’ve seen something very similar to it before, either here in Silicon Valley, or when I’m traveling. And the biggest thing I feel like I can do for entrepreneurs, they know I’ve already seen that, you know, what are you doing? And when I ask what are you doing? I mean, what are you going to do differently? How is your company going to be better than any of these existing companies? So whenever you enter a market, you always have to assume somebody is in that market, fulfilling whatever needs to be fulfilled, because if there’s a need, people will fulfill it. That’s how economics work. Wherever need crops up, somebody comes fulfill it. While an entrepreneurs job is to innovate and figure out how can we do this differently? Or how can we do this better?

Steve Hoffman  19:03
I like to say that there are only two ways I know a company will succeed. And the two ways are one, they have a product that is very different than anybody else out there. They’re using new technology. They’ve opened up something like the first social network, right? Nobody had conceived that you could have an online social network. We had our social networks, but they weren’t online. And it was just very different. And your first-to-market like Myspace or Friendster, you explode. And if you don’t screw up, and somebody else, fast follower, gets it right, then you will maintain your leadership position. So Facebook was the first company to get it right. And now they’re very hard to displace. Their thing is that you do something better. It’s already out there. But you actually do it much, much better than anybody else. For example, Google, you know, there were 19 successful search engines before Google already launched with you know, AltaVista was one, and they were search engines that nobody remembers now.

But what Google did was their algorithm, their page ranking algorithm that they developed. They had developed that for Stanford University so that professors could go online and search and find the relevant research papers to their research. They suddenly realized, “Wow, this algorithm is giving so much better results, not just for research papers, but for anything you would search for than anybody else’s providing. Let’s move into search.” So they weren’t the first. But they did it so much better, that everybody started to use Google. And I remember the day I was around, people were like, “Oh, look, you should switch to Google, you should switch to Google.” And it was simply because it has better results. So when I look at an entrepreneur and their company, I have to see, number one, that they do it exponentially better. If Google’s results were just a little better than their competitors, like AltaVista, nobody would switch because nobody would really know or care. But so, they have to be, what I say is an order of magnitude better, that people turn around and say, “I want to switch.” It’s even harder… It’s easy to switch a search engine, you know, you just go to new URL, it’s much harder to switch a product that you purchased and installed in your factory, or a software system that your company is using to manage things. You don’t want to replace when everybody’s been trained on that. You have to have a darn good reason to switch to that competitor. And that’s what I look for. It’s the number one thing.

Steve Hoffman  21:20
Number two thing I look for, I want to see in a startup, a big market, like the entrepreneur needs to be addressing a big market. If it’s a small market, a market is like a fishbowl. As a venture capitalist… I’m a venture capitalist, I invest in startups. So as a venture capitalist, I want to invest in a company that is going to be the next unicorn. Unicorns are like whales, they’re huge. You cannot grow a whale in a fishbowl, you need an ocean, right? You’re only going to have a goldfish there. So I’m always looking for that ocean. Now they don’t have to start in the ocean. They could start in a niche market, but I have to see a clear pathway where their fish, as it grows, I can hop to the next pond, hop to the next pond, and eventually get to that ocean where they will become a big multi-billion dollar company. And I know that as a fact, because companies that remain small, if I invest in a company that remains small, most of them don’t ever sell. They provide a nice lifestyle for the entrepreneur. They’re decent business, and they’ll grow very slowly and funds have a life. So most funds are around 10 years on average, the life of a fund. That means, as an investor, I have to give back my investors, my limited partners, their money within 10 years. If it’s a slow growing company, even if it could eventually become a billion dollar company, but it takes longer than 10 years, I’m going to have to sell out early and I won’t reap the big benefits. That’s another thing I’m looking for.

Steve Hoffman  22:41
The third thing I look for is the entrepreneur, herself or himself. The entrepreneur needs to have certain qualities. The qualities of what I think makes a successful entrepreneur are number one, perseverance. You do not give up no matter what happens. The other entrepreneurs I see who succeed, they are just, you can put any obstacle in front of them. And they will never say, “Oh, I can’t do it, it’s impossible”. They always say, “How do I get around it?” And they’re constantly trying, no matter how many times they get beaten down their backup on their feet. It doesn’t mean that they, if an idea doesn’t work, they don’t abandon it. That’s something totally different. I can talk about that later. Good entrepreneurs abandon bad ideas all the time, but they never abandon the quest to grow their business. That’s what they never abandon. Number two, good entrepreneurs have open minds, that means that they’re always searching for new information. They’re never taking everything on face value. If they did, you’re not going to innovate, you’re not going to see anything new because you’re just going to do what everybody else does. So they’re always taking in new information, analyzing it, questioning why are we doing this? Why does the industry do this? Could we take this a new direction. And then the third thing, and equally important, or maybe more important than the other two, is leadership. As a CEO, you only have so much bandwidth, so much time in the day, you’re never going to be able to do everything, even if you’re Steve Jobs or somebody incredibly brilliant.

So the thing you need to do that’s most important is surround yourself with other amazing people. And the entrepreneurs that I see who actually break through, they are really good at identifying talent and convincing that talent to follow them. A lot of entrepreneurs, I always tell entrepreneurs, “When you start your company, don’t worry about your idea. Your idea may change.” You know, I just told you, Google’s idea was totally different at the beginning, I can rattle off 20 startups, you know, Twitter and all these other ones that all had different ideas when they began, and then they actually picked the right idea.

I said, “Don’t even think of your idea. Think of who you want to work with. Who are the amazing people you can get on your team?” And you know what entrepreneurs tell me? “I have no money, how can I attract amazing person?” And I’m like, “You’re an amazing person. You’re doing this, you’re taking this huge risk.” If you actually, the test of a great entrepreneur, the test of whether or not this entrepreneur has that leadership gene that I’m looking for is when they have no money, when they have no resources, when they only have an idea or vision of where they can go, can they bring on the people they need? Can they convince them to quit Google, or quit Facebook or just you know, come out of university and join their company, because they believe in where they’re going. That is leadership. So the earlier a startup can demonstrate that, you know, at the very early stages, if they show me, “Wow, I attracted all these great people. They’re all following me in this direction. We don’t know if it’s the right direction, because it’s still really early.” I think, eventually, they will succeed.

Shawn Flynn  25:36
So the CEO, the founder that’s able to recruit all these people, what type of roles should he recruit for? What are the initial positions for a startup?

Steve Hoffman  25:45
I’ll tell you what I like to see in an early stage startup. So I like to see a combination of talent, you need one person to go out and sell the vision, sell the company, bring in resources, this person is usually the CEO. So the CEO’s mission, as I see it, is to be the master salesperson. They bring in everything you need from the venture capital, to the talent you need, to the press you need, to the customers you need. That is the CEO’s role in the beginning. The role of the other people is very important. So if you’re doing a technology startup, you need a really good technologist, somebody who’s very deep on the technologies you need to innovate in the space. The third person I like to see is a designer, somebody who understands user experience and customer experience.

I will tell you, there’s two areas of innovation that actually work with startups. So one area in this is startups that have no money. It’s not like you’re Elon Musk, and you have all the resources in the world. If you want to do a new company, people will just give you money. You have no money. So you have to make progress with just your time and your brains. So at the beginning with these entrepreneurs, what I want to see… So an entrepreneur to innovate, the two areas where they innovate most that requires almost no money are one, they innovate on the business model. They are using new technology to enable a new type of business model. We’ve seen this with Uber, with Airbnb, with many other companies, they say, “Hey, we can do this business in an entirely different way, using this new technology.”

Steve Hoffman  27:25
The second way they innovate is they innovate on design. And this is why I said a user experience person on the team is really important. If you look at a lot of the most amazing startups out there, they have no new technology, they don’t even have a new business model. What they have is design. So for example, take Dropbox which is now a *inaudible*. You know, huge company, right? We’re billions of dollars. When they started, their idea was already existing, it was called X-drive. I remember the software. The problem with X-drive was it was very similar to what Dropbox does, except it was really not user friendly, really clunky. And what Dropbox did was just make it so easy to use. And I will tell you, if you look at a lot of these applications out there, usability is a huge area for innovation. And it’s an area that an engineer alone and a business person alone would never be able to execute on. So when you get that business person, the engineer with the new technology and the user experience person, you have kind of a magic formula for an early stage startup.

Shawn Flynn  28:35
So then how important is it a company having the latest technology or more advanced technology than what’s out there?

Steve Hoffman  28:41
I will tell you, technology matters. But it doesn’t matter that you made it as an entrepreneur. Everybody thinks, “Oh, the entrepreneur has to invent the technology.” Well in most cases that we see out there, the entrepreneur did not invent the technology. The entrepreneur, what they did was they took this technology that’s out there, and they applied it to solving a new problem. Now, let me give you an example. Inventing a new technology takes years, if you’re really doing a core technology, not just a small innovation on top of a technology. But if you’re inventing a core new technology, like AI, AI has been around since the 1950s. It’s only now that it’s taking off. If you are one of the early inventors in AI, you’re probably dead, let alone, you didn’t really get rich off of it, because it had many false starts. The transistor took years. They say the average time, from the time the technology is invented to the time it actually starts to really make money is around 20 years. So most entrepreneurs, they can’t hang around 20 years trying to get this new technology working. What they do is it’s taking the right technology at the right time that’s out there and applying it to problems. That’s what they do.

Steve Hoffman  29:51
You know, Thomas Edison, who invented the light bulb, right? We all know he invented the light bulb. Well, he didn’t actually invent the light bulb, somebody else, a guy invented invented the light bulb. All he did was improve on the light bulb, get it to a point where it could burn a little longer. And then his real genius was never in the inventing. It was in rolling it out scaling the business. You know, light bulb alone isn’t any good. If you don’t have an electrical grid, if you don’t have plugs and sockets and all these things, he rolled that out on a massive scale. And it’s what made Thomas Edison, you know, we still have Edison Electric and all these things so successful. So that’s what entrepreneurs do.

Steve Hoffman  30:31
Elon Musk, we all think, oh, Elon Musk started Tesla. Well, he wasn’t the founder of Tesla. He was an angel investor in the company. What he did was he came in there and transformed that company into the company it is today. He scaled it out. A lot of entrepreneurs are good at coming up with the original idea, but they’re not good at scaling the business. The real entrepreneurs, what they do really well is not necessarily they’re inventive geniuses. In fact, I tell entrepreneurs don’t waste your time inventing. If you want to invent go get a professorship or join a research institution. You could spend all your time inventing there. What you need to do is look for problems to solve.

And you need to look for the new technologies while I still… like I’m an investor. I’m a Silicon Valley investor. So I’m always looking for companies that are using new technologies. I don’t care whether they invented them. I usually… if a company comes to me with a lot of patents, instead of getting excited, a lot of times I get worried, because I’m like, how long did they spend on these patents? I really want to know if whatever this technology is, if they can be the first to market, I will tell you getting to market faster, is more important and executing and scaling your business is far more important than filing patents. You can have all the patents in the world and then you’re just adding licenses. And we see there’s a lot of patent licenses out there. It’s very hard for them to make a lot of money.

I mean, they’re never going to be a Facebook or Google or Twitter or any of those type of companies. They might make some good money if the patents happened to be really, really, really valuable. But what’s even way more valuable is growing a business. And when you grow a business, like Facebook, they didn’t have any patents when they started, they were using PHP software, you know, nothing was unique and Myspace and Friendster were already out there. I told you that. What he did well was he innovated on top of that idea, right? Took the idea of a social network, made it really work, made it really usable, and then scaled it out in a huge way. That’s what Mark Zuckerberg was brilliant at. And he’s been brilliant. Today, whether you think he’s the most ethical person or not, is another question. But he’s been brilliant strategically, you know, acquiring WhatsApp, acquiring Instagram, looking into the future and saying, if we want to dominate, if we want to be a monopoly in this space, what do we need to do to get there? That’s what really good entrepreneurs do.

Shawn Flynn  32:43
So if you were to put an all star cast of entrepreneurs together, people that have had three, four exits, does that necessarily mean that putting them together will make a successful company?

Steve Hoffman  32:55
It’s very interesting to talk about that. And I thought a lot about that. I would say invest in the best team, but is the best team an all star team? Or is the best team, not an all star team? Google did research on this, they asked the same question. You know, Google has thousands of teams around the world. And they are always trying to figure out which of our teams perform best, and why do they perform best. So Google has some teams because they can afford it with amazing all stars, right? They have the best scientists, the best marketing person, people who track records, launching many companies, all coming together on a single Google team to do some new amazing thing. And then they have other teams, with people who don’t have these track records, who might not be the top of their field, the top scientists, and what they found was having better people makes a difference. There’s no doubt. But there’s one factor that’s more important. If you have two teams, the quality of the people is the same, one team will always do better. And they have a magic ingredient. And that is trust. When you have a team, where the different team members really bond, when they really trust each other, meaning they can speak openly. Meaning if they have a problem, they know you’ll cover their back. They know you’ll be there for them. Those teams way outperformed on average all the other teams. And those team didn’t have to have superstars. In fact, a lot of them had no superstars. And they still outperform teams with superstars, when those teams with superstars were dysfunctional, because superstars often are prima donnas. They all want the attention and they end up sabotaging each other and not sharing information, holding back information. All of these things can make a superstar team actually under-perform than a team of average people.

Steve Hoffman  34:41
So with entrepreneurs, I say you don’t have to have a superstar team but you have to have as a team functions well together. And the team is the superstar, not any individual on the team. This is the lesson that Google learned in their research. It’s the lesson that I see every day when I mentor entrepreneurs. And I have a personal story. I can tell you a personal story. So when I was young, I was a kid, I was on a baseball team. And our baseball team just happened to be the worst players ever. We somehow got all terrible players on one team. Our first season, we lost every game. Our second season, we lost every game, and we were in the minors. And then there was the majors for literally, right? And all of us wanted to go to the majors the third year, because you were supposed to, but none of us could, because we’re all so bad.

So we’re on the team three years in a row. And then the third year we start off our season and our coach who has looked at us play and has no faith says I will take all of you to Disneyland. Not if you win the championship, if you just get to the championship, if you’re just in the final playoffs, and we… Something happened, like some magic happened, maybe because the coach had faith in us, maybe because we all bonded and we really trusted each other and we are friends and we are on this team for a long time. And we felt like we have nothing to lose. We really like each other. We’re just out here because we like to be with each other. We started winning, and we won one game, another game, another game, another game. And then our coach left, our coach moved away. We’re not going to Disneyland because we have no coach. So one of the players’ moms came in to try to at least help a little. But we had that trust that, that teamwork, the real teamwork, and we just kept winning, winning. We not only made it to the playoffs, we won the playoffs. We were the number one team, same players, none of us naturally gifted. But somehow teams can come together. And this is why with your startup, getting a team that really functions together is one of the keys to winning.

Shawn Flynn  36:43
But there’s got to be so many other advantages to having that all star team like maybe access to funding. Would you recommend or not recommend a company at the very beginning, how early should they start trying to raise capital?

Steve Hoffman  36:56
I’ll say one more thing on the all star teams, it is easier for them to raise money. Damn easy. And because you know they’ve had a success record, the people pile on the money. But more often than not, we’ve seen those teams flame out, you know, getting too much money too early. I always tell entrepreneurs don’t raise money in the beginning. If you’re focused on the money, you’re focused on the wrong problem. Your problem is never the money. You know, there’s startups here, like DAB, I don’t know if you know fab.com. Most people don’t remember them. But they were an e-commerce flash sale site, they raised $400 million. And you know what happened? They’ve never figured out their business model. They could never make a profit, they would use all this money that they kept getting to acquire new customers, which only masked the problem that those customers were leaving, and never profitable. And we have seen this over and over and over in Silicon Valley. You can see startups that raised far too much money and use that money to cover up the problems instead of really dealing with the fundamental issues.

So I tell a startup, if you want be successful, do not focus on the money at the beginning, don’t care about raising money. First of all, figure out a problem that you can make significant progress on and actually prove to yourself and then prove to investors that this business is real, there’s a real need here. And we’re really fulfilling it in a way that nobody else can. If you can get to that what I call proof point, early on the money you have, you will be in the best position ever. Because if you raise money before you get to the proof point, as soon as investors give you a lot of money, and I’m not talking just seed, or angel funding, I’m talking about like a series A. Once you get like a series A, they don’t want you experimenting anymore. They want you to scale it and they are going to pressure you to scale. And what happens is you end up scaling before you actually figured out your business model. It’s like speeding up only don’t fall off a cliff, right? Doesn’t matter how fast you go, that cliff is ahead, because you’ve never figured that out.

Steve Hoffman  38:55
Really good entrepreneurs will use the freedom they have when they’re young, when they have no money, and they aren’t under a lot of pressure from investors to experiment, radically, meaning try many, many, many different things, and try to figure out what really works or not what they think will work. When we start a business, one reason I always say, the idea isn’t important is that it isn’t. If you look at companies that started with, that are successful today… Take Slack, you all know Slack, the software for communicating in teams. The founder of Slack, he was the founder of Flickr. When he founded Flickr, he was making a game, and that game was not successful. Nobody wanted to play his game. So what you do when a product is unsuccessful, what most entrepreneurs do, they don’t want to give it up so they keep adding features. One of the features he added was a photo sharing, a social photo sharing within the game. He found out that photo sharing was more popular than the game itself. Wisely, he spun that off into Flickr, and boom, it became this huge site. And he sold to Yahoo.

Steve Hoffman  40:06
Second company, Slack, that he started was actually another game company. This guy really wanted to make games like he failed the first time but he wanted to prove he could make a great game that would be a huge hit. He got tons of money at the beginning, because he had Flickr and it was so successful. He launched it. And you know what happened? Nobody wanted to play his game. It just wasn’t that I guess he’s not a great game designer, but it didn’t matter how much money he had. So at a certain point, he was at the same point he was with his first game. He was like, he started the cast some doubt like, “What can we do? This game isn’t taking off, I took all these investors’ money, I have to do something.” And he looked at his company again, and he found out that they had developed a communications system on ICQ where they could all communicate and they had modified it. He said, “What if we took this out and we productized it? It’s really useful within our team, and we gave it to other teams to see if it’s a useful with them.” That became Slack.

Steve Hoffman  41:01
Most companies go through this, they don’t have that brilliant epiphany moment at the beginning. Because at the beginning, you have no data. At the beginning, you just have an idea. Everybody, we all I tell you, I have a new idea every week, and 99% of my ideas are bad ideas. They are not good ideas. You don’t know that. And when you think of an idea, you get this adrenaline rush. And you really want to believe it’s the next big idea. But the hard thing, that thing an entrepreneur really does in the whole process of innovation is about, is the discovery and the testing of whether that idea really works.

So I want entrepreneurs in the beginning, instead of focusing on the greatest idea, instead of raising money… I want them to go out into the real world as early as possible, and begin running experiments where they can gather data, and they can get data that will show them whether they’re on the right path or the wrong path and where they need to go next. And this is what we call an iterative process. It’s a process whereby you come up with your idea, your hypothesis, you go out into the real world, you run an experiment where you can prove it’s either true or not true.

I have this new candy bar that has zero calories. I want to find out if people like it, okay, in my kitchen, I make up a candy bar, right? One of the prototypes, I go out to customers… Oh they gag on the candy bar, it’s just awful tasting, you know, then you gather that data. And after you get that data, you analyze it and say, well, what’s wrong with this candy bar? Why does it taste so damn awful? You know, it’s zero calories. It should be yummy, but it tastes awful. What can we do? And then you come up with a new hypothesis. Oh, well, if we add this, you know, Stevia to it, maybe we can make it taste better. And then you add Stevia and you go through the innovation loop. Again, this is the core of entrepreneurship. This is really what entrepreneurs should be doing in the early days before they have a lot of money.

Shawn Flynn  42:58
And that concludes part one of this two-part interview with Captain Hoff, Steve Hoffman. Now remember to subscribe to this podcast so that you won’t miss part two. And write your comments on iTunes or whatever podcast platform you’re using to listen to this for your chance to win an autographed copy of Steve Hoffman’s book, Make Elephants Fly.

Outro 43:21

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