Now, it wasn’t my dream but I went ahead and did it. Because I was very good at math and computers, I graduated with a degree in Computer Engineering then the minute I graduated, I decided now I’m going to film school. So for graduate school, I took off, I followed my dream, I went to film school, I got a master’s degree and I worked in Hollywood. Then it just took off from there.

After, I worked in Hollywood, I got invited to go to Japan and actually design games. So that was another dream of mine because I was a huge gamer. I was designing games in a big Japanese game company.Then I came back and I started my own game company. That was my first entrepreneurial endeavor and it was really successful.

My first game company did quite well. We made this game that’s still popular today. It’s on Steam called Gazillionaire. It’s all about being an entrepreneur and actually how you make money. After that, the internet came along. It was the big internet days and I jumped in with my friends. We started an interactive television company, kind of combining television, games and technology all together  and all the things I was passionate about. That was the first of three venture funded startups I did.

After the third venture funded startup, I thought I was done. I was taking a break. Then all my friends started to come to me and said, “Steve, can you help us with our startups? Can you help us? How do we raise money? How do we get going?” So I started to give them advice and helped them out. Many of them were younger and it just kept growing and growing.

Today, we have Founders Space, which is an international startup incubator and accelerator. I work with, every year, hundreds of entrepreneurs all over the world, many of them just out of college, some of them still in college, doing their work. Some are in high school even.

I spend a lot of time not only investing or figuring out whether I want to invest in their companies, but also mentoring them, coaching them, and helping them make really tough life decisions about their money where they want to go and what they should be doing. I love it. Even though it’s a job and I work harder than I ever have in my life, I consider my kind of retirement because I love it so much. I can get out there and now, with this whole COVID-19 thing, I’m still doing it from my home and talking to people like you.

Robert Leonard  4:51

Yeah, there’s so much there that I want to unpack that we’ll talk about throughout this conversation. Though we talked about this before the show a little bit and then you just mentioned it there. You have a passion for helping younger entrepreneurs and investors, why are you interested in helping younger generations and what are you really trying to teach them?

Steve Hoffman  5:08

Well, I’ll tell you why, because I may not look like a teenager but inside, I still am. So I live my life every day, and I’ve lived it all the time, doing whatever I feel I want to do, whatever excites me the most, and whatever is the most passionate.

A lot of entrepreneurs are very young and a lot of them have these big dreams, these ideas they want to get going. To me, interacting with them is the most exciting thing I can do. So I not only want to help them but I will tell you, I learned more from the creative minds and the different people I work with. They don’t know it but when they’re totally into something…

For example, they’re totally into cryptocurrency, or they’re totally into gene editing, or they’re into some brain computer interface, technology, then sitting down with them and actually getting them to teach me about what their startup does, how they’re doing it and how they’re going to change things, I end up learning so much.

That’s so exciting to me. Of course, I just want to help them back. I considered it a fair exchange, and we each have stuff to teach each other. Then every time I do it, I get better at what I do. That just makes me want to do it more.

Robert Leonard  6:26

What exactly are you looking to teach millennials?

Steve Hoffman  6:28

A lot of what I teach, there are two sides to it. A lot of it is practical advice. For example, if you’re young and you’re trying to decide what to do with you… I get a lot of millennials coming to me. They’re in college and they’re saying, “All my friends are talking about doing startups, should I do a startup now? Or when I graduate, should I get a real job instead of following this crazy dream? More than 95% of them fail, should I do that or should I get a real job?”

I look at them and I tell them, “It doesn’t matter. You’re going to fail a lot of times in your life, no matter what. You’re going to take wrong turns. You’re going to make mistakes so you can do either.”

The one thing I tell them i that it is more important than whether you join a big company, or a stable job, or whether you do a startup is to make sure that whatever you do, you are learning, improving and growing because if in that job, if you get this amazing job offer, let’s say from Google, and they’re going to really educate you and allow you to do something, work on amazing products and technology, and you’re excited about that, you should take it. You should do it. I mean, it’s going to be an amazing experience for you.

The day that job with whomever it is, starts to become a bore, starts to become something where you’re not really growing, you’re not learning, you’re not expanding yourself, then you should find something else to do, whether it’s doing a startup, joining another company.

The same is true for startups. Startups are great, but they’re not for everybody. You also have to know yourself. If you go right out of college, doing a startup is super stressful. You’re under a hyper amount of pressure. Some people, if you can deal with financial pressure, with pressure from people, you have to basically beg to work for you because you have no money and all these other uncertainties, if you deal with that well, you’re well cut out to do an early stage startup.

If you aren’t and if that isn’t your personality type, you may want to join a startup that’s already going, that has been raising money that’s growing and kind of get the experience without all the pressure being put on you. Or you may want to do a big company or be a doctor or lawyer. There are so many paths through life. None of them are bad. It’s just what you want to do.

Robert Leonard  8:45

Are there certain people that you would recommend really go towards the entrepreneurial path and people that you recommend should avoid it?

Steve Hoffman  8:56

Yes. Number one, there are some qualities I have seen repeatedly in entrepreneurs that define who it’s right for. Now, I will say one thing, entrepreneurs aren’t necessarily born. You can make yourself into an entrepreneur. I myself am not a natural entrepreneur. You may think so today, because I’ve done so much of it. I spent my whole life doing it.

However, the reason I’m not is because first of all, I broke the first rule. I don’t handle stress well or I didn’t handle stress well in the past. When I was younger, it took me a long time to figure out how to deal with very chaotic and stressful stuff. I like things organized. I like to have a plan. I don’t like things to be out of control.

When you’re doing a startup, things are always out of control, but I changed. I was able to overcome that and now like I just don’t get stressed like I do now and then, but hardly ever compared to when I first started.

Number two, there isn’t one type of entrepreneur. Some people are very good at sales. I was horrible at sales and all that stuff. Some people are very good at managing money. I was never that interested in the money side of things. I was actually the filmmaker, right? I wanted to do creative projects, and then kind of just stumbled my way when I started my game company, which was cool for me because I was designing these incredible games into being an entrepreneur. Then I had to learn everything the hard way, because I wasn’t naturally cut out for it.

However, the one thing I had and the one thing I see that’s consistent with people who are entrepreneurs, it’s that number one, even if it stresses them out, even if they don’t have all the skills, even if they’re poorly equipped for it, they love adventure. They love to challenge themselves, they don’t mind taking a chance, and try something. So that’s number one.

They are a type of person who’s very curious, who’s very interested, who’s always pushing themselves to do more and to have new experiences. That’s number one.

Number two, they don’t give up easily. So I failed and I had some companies that were successful, while some that were failures. I had projects that worked and projects that didn’t. Games that were big games and ones there were flops, but you just keep going. You will not stop because ultimately, that’s probably the biggest one, you have to have the curiosity, the desire to do something new. You have to be able to not give up because if you want to give up, it’s not going to happen.

Then the last quality that I see: you can be a co-founder and not have this last quality, but if you want to be the CEO, you really need this. That is the ability to lead. There are certain businesses you can do on your own. Those are called more lifestyle businesses. Those are fine, you can do that without this quality.

However, if you’re going to build a truly big business, like you’re talking about the next Google, Twitter or Facebook or whatever, you’re going to build the next big one, you have to have leadership because you cannot do it alone. You have to be able to bring other people in, to motivate them and to steer them. That essential quality of leadership is the third pillar of being a great entrepreneur.

Robert Leonard  12:06

How can somebody know if they actually have all of these characteristics?

Steve Hoffman  12:10

You never know it first and you can develop these. You can be an okay leader, but there is a lot of information out there. A lot of amazing books, a lot of amazing things and people you can learn from and who can teach you to become better.

Now, you need that drive, right? You can’t be a lazy person. You’re not going to do it, but how do you know, as you asked? How do you know if you have this? You only know by doing it. If you never challenge yourself, if you never put yourself in an uncomfortable position, you will never know what you’re capable of.

The most important thing is if you fail in what you’re doing, and you don’t get back up and start again, and then fail again and start again, then you know you’re not going to be an entrepreneur, right? It’s not going to work.

I’ll tell you, I’m a decent public speaker. Now, I do a lot of public speaking, but when I was younger, all the way through college, I was incredibly shy. I actually was terrified to get in front of anybody to do any sort of sales presentation. God forbid I would do a talk.

What I did is I got up there, I forced myself to give talk after talk after talk. I will tell you, I was god awful. I would be so nervous. I would be shaking, I would be scared but every time I did it, I would evaluate what I did. I would go through what worked and what didn’t work. I would always try different things.

Eventually, I got better and better and better. Now I can speak from sometimes 10,000 people, say travel the world. It’s not a problem. It’s like the same as speaking one on one to me, because I’ve done it so much.

My point is, like I said, probably the biggest thing was perseverance. Keep doing it no matter what. If you have that in you, you will figure out a way to succeed. Nobody can stop you. You may have many, many disasters along the way but eventually, if you have somewhat of a brain, you will be able to figure it out.

Robert Leonard  14:06

Now do you think what it takes to become an entrepreneur can be taught or do you think it’s something innate? This question comes from… I had Gino Wickman here on the show a few weeks ago, if you’re familiar with him. He was the author of “Traction,” the new book “Leap,” and a bunch of other very popular entrepreneurship books.  He talks about how entrepreneurship can’t be taught so I’m curious to hear your opinion on this.

Steve Hoffman  14:28

I totally disagree. So, but everybody’s entitled to an opinion. We’re both probably wrong.

Now, the reason I say we’re both wrong is because in reality, nothing is black and white. I have seen entrepreneurs who have been taught or taught themselves more likely to become a great entrepreneur. Then I’ve seen others who will never learn.

So this is the reality. There are certain people who can’t be taught no matter what you teach them. They’re never going to be a great entrepreneur. They literally will never do it. That goes against their personality, they will not change.

Now, other people can be born a really awful entrepreneur, like I was born an awful entrepreneur, it took me a long time. I was born like not naturally gifted but I was so determined that I just kept hitting my head against the wall. You hit your head enough against the wall, and you either split open your head, or you go through to the next room…  I eventually got through to the next level and the next level after that by just being stubborn, but also being flexible enough to actually learn along the way.

Now, the thing I will tell you, as kind of a fundamental answer to this question is, “Are you the type of person who is open minded enough, and self aware enough to actually teach yourself if you are capable of teaching yourself?”

You could have been born a bad entrepreneur, and you can become a great entrepreneur. If you’re not really capable of adapting, changing and learning from your mistakes and from others, then forget it. So that’s the real answer. It’s somewhere in between and it’s different for every person.

Robert Leonard  16:08

I’m glad you have that opinion. You mentioned right at the beginning that you completely disagree. I’m glad that you do because I think I like to represent different opinions here on the show. If everybody agreed, that might be helpful, because it could give people guidance, but then again, it’s not going to apply to everybody.

So I think it’s good to hear the different opinions and everybody listening to the show can hear Gino’s opinion and they can hear your opinion and then make the best decision for them.

The same goes for stock investing. Certain people will recommend that people only invest in index funds. We had J.L. Collins here on the show and he talks about only investing in index funds. Then we have other great individual stock pickers on the show. So it’s really interesting to hear the different dynamics and I’m glad that you had that opinion.

Steve Hoffman  16:48

Now, I want to tell you an example of this. The question is do you have to be super huge or super fat in order to be a sumo wrestler, a successful sumo wrestler? The answer is if you are super fat, if you have that body build, being that successful sumo wrestler is much easier. So if you’re born with all the natural traits I’ve been talking about, and you know you’re great at sales, you’re great at leadership, people just love you, being an entrepreneur is going to be so much easier, like your chance of success.

I’m not saying it’s the same chance of success for everybody. It’s going to be a lot easier. But even if you’re not, you can push the limit.

Reality is like when I was in Japan, I spent time there. I got into sumo. So one of the best sumo wrestlers in Japan was this little guy. He wasn’t even big. He literally wasn’t super fat but he was very strong. He would use the other guy’s big weight against them. So they would charge up to him and he would move really quickly, and they would fall over and fall out of the ring. Then he would win.

He was amazing, but he had none of the natural attributes you would associate with a traditional sumo wrestler. I think being an entrepreneur is the same way. You got to know your strength, use your strength, and where you’re weak, you got to find ways to make up for it.

Actually, jujitsu and all these things do that. In the real world, it’s the same way. Some people can learn how to figure out even if they’re weak in a lot of different things, how to succeed and other people, they just won’t do it.

Robert Leonard  18:19

I have to say, I think that was probably the first time I’ve ever had someone on the show use sumo wrestling as an analogy for entrepreneurship. I actually really liked that. I think it was a very good illustration as to the concept that you explained. I think that was really good. I liked it.

Now, I want to dive into some of the investing that you’re doing. A lot of the people that listen to the show today are really interested in investing. I want to talk about that. I know you have equity in close to over 100 startups.

The first question I have is how did you even come across these opportunities? Were they part of your incubator program, or did a lot of these come before you even started that?

Steve Hoffman  18:54

Some came before, but the majority came after. So when I was doing my own startup, I was too busy to invest much. I was  so overwhelmed with  the million things you have to do when you’re doing a startup, that I was focused on that. But later when I began to help out friends, and then it expanded, I started a blog and people started Founders Space blog. People started to ask questions and I got a lot of people coming to me with their ideas.

Of course, it was a really good idea. I would want to invest in it. When we started our program, I got a lot of shares from the companies joining our incubator and accelerator program.

I will tell you, investing in startups is hard. Most angel investors and if a young person, a millennial wants to invest in a startup, they need to be careful. What you have to consider is your first 10 investments are your learning experience. It’s better to always learn with other people. It’s better not to always learn on your own because you know nothing.

One of my key pieces of advice to any millennial that’s thinking of investing in a startup is to join an investor’s group. If you have the money, join a group of other investors. They have these angel groups here in Silicon Valley that get together. What they do is they get together and they evaluate the startups together.

In that process of hearing how other people evaluate the startups, you will learn so much about what makes a good investment and a bad investment because these people have been around the block. They have made a mistake.

Many of my friends who just dove into investing, they have money, they ran their business. Well, they felt like they understood if they were lucky, you know what they told me? They said, “Steve, my first ten investments, I lost money on nine of them. I made money on one. I was so lucky that one made enough money for me to break even.”

That was the lucky one. The unlucky ones, they didn’t make money on any of them because it’s really hard. It’s hard for professional investors. You always read about the guy who invested in Twitter early, and then it just made him a billionaire and all these things. But for most people, it’s not that easy.

I could talk for hours on the criteria you use to evaluate startup companies but my biggest piece of advice is get with more experienced people and do it together with them. Then if you can’t find or you don’t have an angel group in your area, get together with one, and get your friends there. Get other business people in there, meet more minds to figure this out together. Read a lot and watch videos from people who are investors. Learn as much as possible. Don’t think you know it. Invest small amounts of money, small amounts of money at the start, just kind of for fun.

If you’re learning to play poker, you’re not going to go all in with all your life savings on your first poker game. You’re not going to think that you can beat these poker champions doing it. Don’t think the same way. When you are investing in companies, just give it a little bits of money. Experiment, have fun like a small poker game. If you win, you probably won’t wind up retiring off that win but you also won’t wind up squandering your whole money so that you can try many times, and you will get better.

Robert Leonard  22:21

Let’s dive into some of that investment criteria that you look for in startups. I’m curious to learn more about that. I’m sure the audience is going to be as well. How did you decide which companies to invest in and what exactly were your investment criteria?

Steve Hoffman  22:35

I have a number of criteria. So I have 10 criteria that I use, but I will only go over the most important ones here.

Now, number one, when I look at a startup, the first thing I look at, above and beyond anything else is the team, the people, because I will tell you, at the end of the day, the people… You can have an entrepreneur with the most incredible idea ever but if that entrepreneur’s team is not good, they will fail to execute on it. They will not be able to bring it to market in a way that the product is any good. Maybe their idea was good but it’s a huge step from the idea through implementation.

The idea is like 10%. I mean, the idea sets the direction but whether you actually achieve the goal is a whole nother thing. So the idea is you can start in the right direction.

Now, the thing about startups that’s crazy is what seems like a good idea at the beginning, more often than not, is a bad idea. It’s actually not the right idea. You look at companies like YouTube, and you think, “Oh, those guys, they started this company, and they are so successful. How did they come up with the right idea at the beginning?”

Well, the fact is, no, most people don’t know this but YouTube was a dating site, a video dating site. Nobody likes to date by video. It totally failed. It was only later when they figured out they could use the same technology to allow people to share videos that they actually took off.

The same was true for Twitter. Twitter was an early podcasting site before it was really big. They were too early and they were failing. That’s when they came up with Twitter. You go on and on and on. Facebook was like a “hot or not”site, kind of another type of dating site, which became a social network.

All of these things, people, what we call iterate or pivot along the way but the thing that’s constant usually is the team. Are they the type of people that I described earlier? Do they have that natural curiosity? Are they trying different things? Are they analytical? Are they able to learn from their mistakes?

If you talk to the people and you’re really impressed with them, the chance of that company succeeding, especially when it’s an early stage company, not later, is much higher.

I’ve had teams come to Founders Space, and some of them I’m just like, w”Ww, these people are amazing. This team is amazing. I don’t even like their idea, but I’m going to take a chance on them.” More often than they succeed.

Then another group that comes in and they have what seems like a pretty cool idea but their team just isn’t all there. Now, if you’re looking at the CEO, and you’re saying, “How do I know if this CEO is great, they went to Stanford or Berkeley or MIT? Is that a good thing?”

Well, yes and no. It shows that if they could get into those universities, they must have some brains. They could apparently do pretty well on scores but does everybody who goes to Stanford, Berkeley or MIT all cut out to be entrepreneurs?

No, some of them would be better off being professors, researchers, or the doctors or something else. It doesn’t mean they have the skills to be an entrepreneur.

I mean, you look at many of the great entrepreneurs out there like Jack Ma who founded Alibaba, one of the biggest companies in the world.vHe went to a no name college and barely got through. So there you go.

Also, there are a lot of entrepreneurs out there who didn’t go to these Ivy League or top tier universities who turn out to be much more natural entrepreneurs, and much better. The other should be academics or something else. So the school isn’t everything.

Can you tell if they worked at Google, Twitter, or Facebook? Are they the right people? Well, those are huge organizations with hundreds of thousands of employees, not every one of them is cut out to be an entrepreneur. It doesn’t matter if they were the Vice President. They may be perfect in a big established company but that doesn’t mean that they have what it takes to be an entrepreneur, often they don’t.

The one thing I look at, I do give credit to their background so if they have a good background, naturally, it means something. But the thing I look more deeply at when I look at them, I ask them, “How do you solve your problem?” And I ask them about their business. If they are the type of person where they can really articulate very clearly to me how they think.

For example, I ask, “Who is your customer?” Then they start to tell me how they got to know their customer, how they figured out what they need. I see how their brain works, then I start to say, “Wow, this person could really learn and figure things out for themselves.” That’s number one.

Number two, I ask them about their past, did they have leadership skills? Did they head any organizations or clubs and what did they do? How did they recruit people? It could have been on the college campus, it could have been in the high school. I don’t care, I just want to see if they have that ability. If they’ve used it, did they push themselves? Did they do these things that I think are essential?

Then thirdly, the most important thing, I look at the people they’ve surrounded themselves with. Who did they bring on their team? Did they bring people on their team that are just anybody they could find? Were they desperate that they just got somebody? Or are these people amazing people, like they could have founded their own companies, or they could have been working for Google for a six figure salary but instead, they chose to join this other entrepreneur, and basically forfeit all the other opportunities, because they believe in that person? That shows me.

A lot of entrepreneurs will tell me, they’ll come alone. They’ll say, I don’t have a team, or I’ve just hired some contractors. They will say, “How can you expect me to have a great team? I have no money, who’s going to join me for no money, when I have just these shares in the company, but the company is nothing?”

I turn back to them and say, “That’s your job. If you’re going to be a great leader, if you’re going to show that leadership, leadership is about getting somebody who could have a job at Facebook, or Google or Microsoft, and getting them to give up that job, quit that job and come join you, because they believe in you.

If you can do that, if you can show me you can lure those people into your world vision, and give them something that they believe in, I will believe in you like that’s your test. That’s the litmus test. So I look for all these things combined and that is just my first criteria.

Robert Leonard  28:54

Tell us a few more, I’d love to learn more.

Steve Hoffman  28:59

Criteria number two, I look at their product. It doesn’t have to be fully built out. It can be in a PowerPoint. Hopefully it’s a prototype. Usually I like to invest in a prototype or beyond or it’s in the marketplace, but I look at their product. I ask them, “Why would somebody… There’s always another solution out there. Whatever you’ve invented, no matter how novel and new, somebody else has been doing things. We’ve been around on this planet for a long time, we figured out how to solve most of our problems using older tools, right? So why will they use your new service or your new product? What are you doing better?”

Now if they tell me my product is like all my competitors, but it has this feature and this feature and this feature, I’m not interested. Why? Because features make a product incrementally better. Like they make a product a little better. Oh, you have an extra feature. That’s nice. I don’t want features. Nobody switches.

If you told me, we’re using Meetup right now to conduct this interview. I’m happy with Meetup. I like it. If you told me that there’s another software out there that is like Meetup, but it has this extra feature, most people aren’t going to switch. We’re just like, “We already know how to use this, we’re already using it.”

In order to be successful, a product has to offer a fundamentally different value to the customer that the customer isn’t getting from whatever’s already on the market. If it just makes it a little better, nobody’s going to bother because people have inertia and they won’t move.

For a startup to break through, and it’s really hard to break through, we read about all the success stories, but you never read about the failures. It is extremely hard to break through.

In order to break through, you can’t just improve upon what people have, you have to have two things. This is what I look for, you either have to be exponentially better, meaning that this product is so much better than everything else out there that of course, I’m going to switch.

So at the beginning when Google launched, there were 19 other search engines way ahead of them, there’s AltaVista, Infoseek, all these search engines out there. I remember using those, but when Google launched, their new algorithm for finding results made the others look prehistoric. Literally, their page ranking algorithm was so much more effective that you always wanted to use Google. So they were exponentially better than everybody else and that allowed them to rock it ahead. Everybody just switched. Otherwise they wouldn’t have switched.

The only other way is to be different, to offer something that nobody has value that nobody else is getting from the other products in the marketplace. If the startup does this, and they’re using technology, so that they can enable people to do something they couldn’t have done before…

It could be entertainment value, it could be productivity value, it can be bringing in more revenue to their companies, if they offer this additional value, that can be enough, if it’s really valuable, right, not just sort of valuable, that can be enough. That’s my second criteria. If I can see either of those things, I start to get excited about the company. They have something here.

Robert Leonard  32:05

Let’s talk a bit about what is a disqualifier for you. When you’re talking to founders, or you’re looking at a company, what are the types of things or what are the characteristics that you see that’s an immediate red flag and you’re like, “I’m out, I don’t want to invest in this company”?

Steve Hoffman  32:20

There are so many things. Number one, if they say there’s no competition, they’re out. That means they haven’t done their homework. That means they’re either lying to me, because they’ve looked at their competition and they don’t want to show me so that they’re not being honest, which is bad, because we need to have an honest relationship. You need to tell me why you’re better if you’re not showing me your competitors. Showing me detail by detail why you are superior, I can’t even evaluate your startup.

Number two, there is no competition. It means if there’s no competition, and there always is competition. It means there’s no business. That’s why nobody else is doing it. There’s no solution because nobody cares. Nobody cares about it.

I’ve had a company like that. We started a company and we were  working on it. Then all of a sudden, we realized that there was another company out there who’d done pretty much what we were doing. They were the only one we could find. They had failed.

What did that tell us? That told us that we better not do that. We’re just going to go down the same path they went down. Consumers don’t want this. That’s why there’s no competition. So you should get very worried if there’s no competition. Number one red flag.

Number two: small market. Literally venture firms and even angel investors, you need a big market. Investing is risky, you’re going to lose most of the bets you place on. Early stage startups aren’t going to pan out, like I said before, but if one of them hits big, if one of them goes IPOs, that’s where you make all your money.

It’s not just angel investors, every large venture fund knows that they could have 20 startups in their portfolio. If one of those companies is going to make more money than all the others combined, that’s the math. That’s just how it works out because it’s so hard and when something works, and it’s in a big market, it goes.

So if the market is small, if the market is constrained, it would be like trying to grow a whale in a fishbowl. It’s just never going to work, you’re never going to get a whale out of fishbowl. It isn’t a big enough environment. So we need to see a lot of customers who are willing to pay a lot of money.If that isn’t there, we’re out.

If the entrepreneur doesn’t have a good team, I mentioned, we’re out. If the entrepreneur… There are times when I look at the technology and the entrepreneur will spend forever on this technology, they’ll file all these patents. They’ll be working on the technology for years. Then I ask the entrepreneur, “Who is your customer? Who will actually buy this product?” They’re like they don’t want to talk about it. They just want to talk about the technology. I know that company is not going to go anywhere because either there are no customers or this person fundamentally isn’t capable of even thinking about customers.

A technology alone never wins. Like I always say, technology’s worth nothing unless somebody wants it. It’s not the technology that’s valuable. What’s valuable is what the technology can do for the customer. That’s what’s valuable. So if you can’t prove that to me, if you can’t show me how this technology translates into providing value for customers, then you have no business. You just have technology. Might as well be in a research lab or university, which is great, which is probably where you should be and which is where many of these inventors are.

One thing people get confused is they think entrepreneurs are inventors. Well, entrepreneurs aren’t inventors. Usually, they might be inventive. They are definitely innovative. They’re like innovating, but innovating and inventing a new product are different things.

When you invent something like a new core technology, that out of a research lab, that usually takes 10 on average, it’s like 20 years from the time they invented transistors until we saw really useful computers. Or the time they first had the first AI algorithms to the time where those AI algorithms actually produced any results. It’s decades.

So inventing something is not the important thing. The important thing that an entrepreneur does is take technology, whether they invented it or not, is irrelevant. But they’re the first ones to take it and identify how this technology can be used to solve really hard problems in the world, for real people and real businesses. That’s what matters. So if I go there, and it’s just a technology, I’m out.

Robert Leonard  36:26

Let’s talk about how an investor actually makes money in investing in a startup. You briefly mentioned through an IPO is one of the ways, but there’s very few startups that actually make it to that point.

You also talked about how sometimes you can invest in 10 companies, nine of them will fail, you’ll lose all your money, but then that one company will make enough for you to still be breakeven or even profitable. And then given that most startups aren’t profitable, you’re not getting monthly cash flow, most likely you’re not getting any dividends or anything like that from the company. So how do you actually make a return when you’re investing in a new startup.

Steve Hoffman  37:01

There are a number of ways to make a return, but you really almost never make money unless the startup does one thing. That’s called an exit. An exit is when those shares that you own as an investor are sold to somebody else.

Now, you can have different exits, like you could be an early investor, and sell your shares to venture capitalists, right? So some big venture capitalist firm comes in, or a PE firm comes in, and they buy up all the shares, and they want to buy your shares, you can sell them. Usually, you’re better off holding on to their shares. If there is a well established venture firm that is willing to pay you for those shares, that means they expect those shares to grow a lot. Unless you know something that they don’t, you should probably hold on to it because they’re going to be able to give the company the capital to get to the next level.

The best exit is when a company is acquired. We always read about it: big corporations, Fortune 500 companies step in and buy a startup for a billion dollars. That’s an exit, or if the startup goes IPO. So if a startup usually doesn’t get acquired, or doesn’t go IPO, in most cases, not all, but in most cases, especially for venture backed startups, you will never see a penny, because when they shut down, usually it’s at the point where they have no money.

Usually the IP, like I said, the technology, the intellectual property that they’ve developed on a startup is closing, that’s a fire sale. They’re usually selling… it barely pays off whatever debts they had, if it does that.

Startups are sort of binary investments. Usually, you’ll either make a lot of money, or you won’t make much at all. And that’s why most investors like to invest on a 10 year horizon, because the reason they need 10 years is they could sell those startups earlier with the winners, they could sell earlier but they don’t want to.

If the startup is onto something, if they have what we call traction, if they’re growing really fast, the last thing they want to do is sell it during that growth spurt. They want to hold on to it and let it reach maximum value. Then they put it on the public market and let the public buy it or let a big corporation step in and pay a premium then buy it.

When they sell a startup, they don’t want to sell it for what it’s worth today. They want to sell it for what it will be worth and there’s sort of a curve, right?

As an investor, you want to hit the maximum point on that curve, the maximum for the time you invested in the money and invested the maximum return. So that’s what VCs are always juggling.

Now, it’s always a risk, because you could have… the market could change. There could be a financial meltdown, there could be all sorts of things that happen. There can be another competitor or new tech with a new technology could emerge and displace them all these things happen.

So exiting is a sure bet, right? But do you take your money off the table too soon? Or do you let it ride you know, and get the big payoff at the end? That’s what investors are always juggling.

If you’re a typical angel investor, you’re probably not on the Board of Directors, so you’re not going to be involved making those decisions. But you may be, if you were early in the company, if you secured a board seat, you may be involved in helping steer and guide the company.

I always say it to investors, either don’t invest in startups that you don’t think will be huge, because if you don’t think they will be huge, it’s very unlikely other investors are going to come in and keep giving this company money.

As soon as they hit a road bump, as soon as they hit a hard spot where they really need money, they’re just going to die, because no other investors will step in. Only the companies that are growing rapidly are the ones who have a high probability of securing money, more money, or ones that can reach profitability.

The last thing, and this is really important, probably my most important point for angel investing. There are two different types of angel investors: there are angel investors who do venture investments, which is what I’m talking about. Venture investment means that that can grow potentially into a unicorn, a billion or multi billion dollar company.

However, there are other types of investors that might invest in a local restaurant. They might invest in a laundromat. These are generally not good investments, unless you completely control them yourself because what they end up with is you end up giving whoever started the restaurant, money to start the restaurant.

Unless you have some guarantee of some sort of profit or revenue sharing, you won’t see any money. They will keep all the money because what most restaurants, unless they become this huge chain, don’t sell for anything. They just close down at some point. So you’re just funding their lifestyle.

That’s why in Silicon Valley, we call it lifes. You don’t want to be a lifestyle investor. First of all, the multiple on returns are far less. So you’re still taking a huge risk on a small business but with the upside is much, much smaller.

So I just tell people, unless it’s your restaurant, I’d recommend not investing in or unless it’s some famous chef, and they’ve guaranteed you ironclad, you have to have lawyers go over this, like some sort of revenue share in there, where you’re going to get paid back really well for the risk you’re taking.

Because I will tell you, the amount of risk you take and investing in a small business, like any small business, and one that could be a huge business is about the same. The risk is about the same, but the ones that can become huge business, you have an exponentially higher upside. So the risk versus return ratios are completely different. You need to take this into account.

Robert Leonard  42:36

You mentioned the restaurant space. You mentioned a couple others. Are there specific industries or sectors or company types that you like to invest in?

Steve Hoffman  42:45

Yeah, so there are different categories. Now, I’m a tech investor. So when I invest I typically but not always, but typically I invest in companies that are leveraging new technology that give them a strong competitive advantage. When they go into the marketplace, all the existing incumbent players are at a disadvantage compared to what they have. They’re moving fast. That’s what I look for.

However, there are many types of investments out there. You could invest in real estate, that’s something I’m not talking about. It’s totally different. In real estate, I always say if you’re an investor, the more control you have over the investment, the better in some cases.

My feeling is, in certain investment sectors, there are a lot of different sectors you can put your money in. So there’s hospitality, there’s food technology, there’s just the food business. There are some commonalities.

Now, you don’t have to use technology to invest and become a really good company.

Let me give you an example. There was a company of this guy, and he was distributing this clothing. He was like doing some kind of sports clothing up in Canada. He was mildly successful, he had some failures. Then he figured out one thing. He figured out women really want yoga clothing. They really want this. He was at just the right time. He caught what I call a wave. It’s a trend, right? He caught the trend of just at the beginning of the whole yoga movement. He made Lululemon, which you probably heard of the famous yoga brand, right?

He was the first one out there who really targeted these yoga women and made it really a great product just for them. Then it just spread virally. Even if you weren’t into yoga, you were buying Lululemon because it was cool. It was hip. He had built a brand. Now would have that been a great investment for me? Yeah, of course, it would have been an amazing investment.

There are restaurant chains that can do that. There are other businesses, but what you have to look for is what do they see? What insight do they have to the market that other people don’t have? So it can be a fairly traditional business like clothing, food or hospitality, but they have to have some insight that the other people are ignoring, the big players are ignoring or they are not meeting that market demand.

I always like to say of entrepreneurs, the hardest thing you ever do as an entrepreneur is not to create a great product. That comes second. That’s later, because you can have the best product in the world and if nobody wants it, it means nothing.

The hardest thing you ever do is hunting for extreme demand, where there’s an unmet demand in the marketplace, because the market has changed, like how yoga became popular. You can come in with a solution that you can create for those customers. If an entrepreneur has figured this out, everything else usually takes care of itself. That is the hardest thing they do.

Robert Leonard  45:38

Because we’re recording this when we couldn’t have a podcast interview without at least talking about it, so I want to hear how the coronavirus pandemic is impacting Silicon Valley and also just startups in general.

With startups relying so much on capital, it’s probably pretty easy for them in the last few years that we’ve been experiencing. Capital is pretty easy to come by, especially in the venture world. During times like this, the venture capital starts to dry up and angel money starts to dry up a little bit. So I’m curious to hear how startups in the valley are being impacted.

Steve Hoffman  46:12

Right now with the Coronavirus, it’s a tough time. It’s tough for everybody. I mean, we’re all in our home. So imagine you’re running a startup, you’re trapped in your home. Now it’s harder for some than others. So for some that work offline with they run events, or they do things like that it’s murder, right? Your whole business goes to zero.

For others that work with people who do offline, there are some tech startups that work with restaurants and retail stores. For them, it’s brutal, because all their customers are now not spending on technology. They’re cutting their costs. So you look at like, Yo!, they just laid off 1000 people. That’s just one example.

Other businesses are more immune to that. Some are doing well like Zoom that we’re using now for this. If it weren’t for the security issues, they would be on top of the world because this is a perfect situation for them. Look at Amazon, right? It’s no longer a startup, neither is Zoom, but they started as startups.

Companies like e-commerce and things like that they’re doing better than ever. This has actually been a boon to their industry. So it really varies.

Now, funding wise, it’s brutal, because investors want to meet you face to face. They really don’t want to invest, because they met you on a Skype interview or a Zoom interview, or whatever and talked to you. Somehow, even in today’s world of AI technology, people want to meet people face to face. That’s how we feel we really know somebody and like I said before, it’s a people-driven business. You want to know the entrepreneurs.

So most investors, even if they say they’re actively investing, they are not as active as before. They are holding off. Also, there’s a great amount of uncertainty. They don’t know, nobody knows. The stock market is up and it’s down, and it’s up and it’s down. We don’t know what the next six months will hold.

In uncertainty, especially when there’s a long time horizon, and so many opportunities to die along the way, which startups are very fragile. In a down economy, big companies like Microsoft and Google, they’re going to be fine, right? They’re going to survive. They’re not going to go bankrupt. But in a down economy, startups get murdered.

If you’re an angel investor, you’re being very cautious right now. If you’re a later stage investor, you’re investing more in companies that have a lot of growth and you can see that they’re going to rebound and they have the resources to handle this, then it’s a much safer bet to continue to invest in them. Maybe it’s a good time because their valuation might be less.

We’re seeing this dynamic play out. For the most part in Silicon Valley right now investment is on hold until people get out of their homes, then it’ll pick back up and we’ll see a lot more activity. There’s still investment going on, especially deals that were already in the pipeline.

So you read about now that deals are closing. But those deals have been in the works for a lot of times several months, they’ve been working on those deals, and they’re just now coming to fruition and being announced. What really tells us in three months from now, how many deals do we see? Then we’re going to know the true market, not the deals you’re reading about today. That is where we’re at.

Robert Leonard  49:10

Most people listening to the show today are newer investors, and they likely can’t invest in startups the same way that you have and continually do to this day. But an alternative that is available is crowdfunding so they can invest in startups through crowdfunding. What do you think about millennials investing in startups via crowdfunding websites? Is that a good option?

Steve Hoffman  49:33

I think using crowdfunding websites is a great option. In fact, I encourage investors I use like AngelList, which is a crowdfunding site for angel investors. You can learn so much on those sites by watching what other more experienced investors do and participating in those rounds.

Again, you have to be careful. Start off with small amounts of money, play small bets and learn. First of all, it makes it more fun to put your own money down rather than just pretend to invest, put a little money down. But a lot of these crowdfunding sites will allow you to invest as little as like $1,000, sometimes even less. In these companies, usually, like 1000 is the minimum.

However, the problem is even $1,000 is a lot to a young person, right? So you’re like, “Oh, it’s only $1,000.” I’m saying that, right? Because I’ve been around longer, I have more money. Though for most young people, that’s a huge amount that’s part of the issue that they’re going to come up against.

Now, you also have to remember, it’s not like you’re investing in a stock. Like a stock, if you get desperate, you could sell it and get your money back. When you invest in a startup, that money is tied up for. A lot of times, like I said, the lifespan of most of these startups till you see a return could be 10 years, sometimes longer.

These companies seldom get bought or go public quickly. The better they are, the longer they take. And if they’re really bad, they never make money. So you’re kissing that money goodbye.

Now, as a young person, I will tell you the best investment you could ever make with your money, your education, your growth, if you are investing in yourself. You are the best investment. That investment is going to pay off.

Why should you take your hard earned money if you don’t have a lot of it, if you didn’t inherit a trust fund, or something like that, or make a billion on cryptocurrency, if you aren’t one of those millennials, why don’t you take what little money you have, and put it into you? Because you are going to get double benefits.

Instead of giving your money to make somebody else’s dream come true, save your money invested in what you’re working on. If you have a dream of becoming something, learn, read and take courses.

For a small amount of money, a few thousand dollars in savings, you’re going to get a much bigger bang out of that than putting it into some startup and waiting 10 years to see what happens. You’re not going to learn much or get much out of putting all your money into that.

However, it doesn’t hurt for you to go on crowdfunding sites and study them, especially if you want to be an entrepreneur, or an angel investor in the future. You can go and study and track these companies without putting your money in, while at the same time investing as much money as you possibly can into yourself in your own career.

Robert Leonard  52:09

I think that’s great advice. I think it’s interesting that you have that advice, because we had someone similar to yourself with a similar background to you on the show a few weeks ago, James Altucher. He’s also a very big angel investor and he talked about the same exact thing. He said that the best piece of advice he would give is investing in yourself.

First, the returns you can get by investing in yourself is just unprecedented. You can’t earn those returns in any other asset class, whether it’s stocks, bonds, mutual funds, angel investing startups, it doesn’t matter. The return you get on investing in yourself, whether it’s a course or a new skill is unmatched.

Steve Hoffman  52:43

Even saving your money so that it buys you time, right? So you don’t have to go and take a job right away. If you have a savings account, and you have the money in there, you can live several months, that allows you to hunt around for a better job, instead of making whatever job comes to you first, which might and probably is not the best job you could get.

The more time you have, the better and that job is going to be instrumental in your career path. You would be surprised how much a single job the difference it can make in where you end up because the people you meet on that job, the quality of the people, what you’re doing everything, every step you take leads to another step.

So if you are going to just take whatever, really smart people don’t take whatever is easy or convenient. Really smart people look at what they want and plot it out. What do I need to do? And they are willing to sacrifice in the beginning. They are willing to sacrifice because they don’t put this money into stocks. They don’t put this money into startups. They don’t put it into real estate. They’re using the money so that they can have the time and make the decisions that in the long run will really benefit them the most strategically.

For example, going back and getting a graduate degree can make an enormous difference. Just the pay and the amount of responsibility you get from going from an undergraduate degree to a masters or a PhD over the course of your lifetime. Enormous value. Way more than you could get on most stocks for the money you invest or taking courses.

You don’t have to pay to go to graduate school, you could just read more books, to go out there and experiment with stuff or even volunteer to do a job. Instead of just jumping in to a job. Say I want to do a one month internship with them. I’ll volunteer. They don’t have to pay me anything. I just want to go figure out if I even like this business before committing.

Robert Leonard  54:27

Yeah, I’m not saying I am super smart by any means but I’ve done very similar things in my career. I actually got my first job out of college and then I had an opportunity to go somewhere else. It was actually a step down in pay but I thought the opportunity was very large for me. I thought long term. I said this is going to be a very good move for my career. I’ll consider this like an investment.

Maybe I’m making a little bit less in the short term, but in the long term, I think it will lead to more. Then the reduction in my pay is that investment. Within a year and a half, it led to a significant increase. I doubled my salary in my new position.

I said, I was thinking for the long term, which I was, it ended up only being a year and a half, two years later but it’s worked for me personally in my career, exactly what you said. I went on to get a graduate degree. I didn’t really want to do that, per se. It was 16 years of school. I was done, I was ready to be finished but I decided to push through for those two final years to get my MBA.

I’ve done very similar to exactly what you said, with both graduate degrees and my career. I think it’s been very helpful for me so I think that’s fantastic advice.

Steve, I know there’s so much more that we could talk about. I could talk probably for hours like you could and enjoyed learning all about the valley, and also startups, how to invest in them, how they make money, how to make money as an investor in them. So we’ll definitely have to have you on the show to talk about that more. But for those listening today that want to go connect with you after the show, where can they go?

Steve Hoffman  55:51

Just come to foundersspace.com, you can contact us there. We actually have an online program, a three month online startup program. It’s very cheap, especially for students, we make it very cheap. But if you can’t afford it, for whatever reason, we’ll give it to you for free. Like you just have to ask us because I believe everybody should have an education. If you don’t have the money, we don’t ask any questions. We just support you.

I also have two books, you can get them on Amazon or anywhere else, their audio books, Kindle and all that stuff. My first book is “Make Elephants Fly,” which is all about how to get your big idea off the ground. The elephant is your dream, that thing you want to do, and making it fly. It basically shows you step by step how entrepreneurs have done it.

Then my new book, it’s being published by HarperCollins. It’s not out yet but it’s called “Surviving a Startup.” It’s basically everything you need to do to survive. Hopefully, after all my experience and all the startups I’ve worked with, wind up on top.

Robert Leonard  56:51

That sounds like a great program that you’re offering. It’s awesome that you’re giving it away for free for people that can’t afford it. I think that’s amazing. I think it’s very noble. I’ll also put links to the books and resources that you just mentioned in the show notes so that everybody listening today can go check those out. They can learn more about what you got going on and dive more into your content.

Steve, thanks so much.

Steve Hoffman  57:10

Thank you. It’s been wonderful.

Robert Leonard  57:12

Alright guys, that’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week.

Outro  57:19

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