We recently had the opportunity to sit down with LinkedIn (LNKD.DL) founder Reid Hoffman, who has just written The Alliance: Managing Talent in the Networked Age.
This exclusive interview appeared previously on our premium investing service Motley Fool One. A full transcript follows the video.
Enjoy, and Fool on!
TOM GARDNER:
We're here in Mountain View, California at the headquarters of LinkedIn with the founder of LinkedIn and the executive chairman, Reid Hoffman, who's also the author of The Alliance: Managing Talent in the Networked Age -- a wonderful book that just came out in the last -- eight weeks?
REID HOFFMAN:
Yes. Eight. Maybe nine, now.
TOM GARDNER:
Did you go out on a book tour, by the way?
REID HOFFMAN:
A half a day.
TOM GARDNER:
Perfect.
REID HOFFMAN:
That's all I had time for.
TOM GARDNER:
I'll just say that I think book tours -- let's go in a different direction with our conversation and discuss book tours. But it's not the most efficient way to get word out about the new project that you worked on.
Let's start with one story in the book, which is the story of John Lasseter, just because I think he captures, pretty well, the problems [of] many companies. Gallup data shows that 70% of people are going to work either indifferent or downright negative about their job or their boss or their employer, [and] they're missing the opportunity that maybe somebody like John Lasseter is bringing their way at their company. Maybe give us the John Lasseter/Disney/Pixar story.
REID HOFFMAN:
Oh, the John Lasseter story? I've met John Lasseter, now, actually. So, John was working at Disney. A young person. Maybe first job. He went to them [saying], "Oh, we should do computer animation. We shouldn't do it this way. We could do these amazing things." The management, [rather than] saying, "Well, look. They key thing about companies in the modern age is being adaptable. The key thing is actually using intelligence that comes from the network inside the company and broadly in terms of figuring out what is our future." [They] basically said, "No. That's dumb." And they fired him. The absolute worst possible response.
TOM GARDNER:
It was essentially like, "We're tired of your crazy ideas. We've asked you to do your job, and you keep bringing these ..."
REID HOFFMAN:
Yes, exactly. And so the end result of that, of course, is he goes off and co-founds Pixar. Pixar is a mammoth success and the way that Disney keeps its feature is Disney buys Pixar. Which, of course, shifts from an individual salary to a multibillion dollar acquisition.
TOM GARDNER:
Value that could have been created inside of Disney ...
REID HOFFMAN:
Yes. Exactly ...
TOM GARDNER:
... was missed because they didn't look at their employee as anything more than an asset to manage ...
REID HOFFMAN:
Yes ...
TOM GARDNER:
... rather than talent and passion to unleash.
REID HOFFMAN:
And the key thing, when you think about how do you have an adaptive and innovative company, is you have to think, How do I get a network of ideas to refine them? So, it's not command and control. I am CEO. It is my vision ... Even Jobs, by the way, didn't work that way. Steve Jobs did not work that way. He constantly was talking to people, getting a sense of what are the things that [are] possible for [them] to do. You want to architect that structure all the way down in the company. Because there are even managers saying, "How do I get network intelligence in order to know what I'm doing?" because we live and work in a networked age.
And so the thing is [if] you have an interesting, innovative, ideating employee, you say, "OK. Is this good stuff? Like [they're] bringing something up. I should pay attention to it." Now, if he was saying, "I think we should be doing tiddlywinks ..." On a LinkedIn interview, sometimes we'll have that. I'll go, "Okay, that doesn't work." But like clearly computers [and] software [are] going to transform animation. This is a good signal. How do we encourage the people to actually help us adapt in the future?
TOM GARDNER:
One of the beautiful things about network intelligence, which you articulate so well in the book and which is in evidence at LinkedIn since inception, is it essentially invites people to admit that they're wrong. Once you have a network of ideas, there's no embarrassment. It's one of the hardest things to do is to take a public stance and say, "I made a mistake." I've always loved the John Maynard Keynes line, "What do you do when you get more information that suggests you're wrong? I change my mind."
REID HOFFMAN:
Yes, exactly.
TOM GARDNER:
That network invites exchanges and ideas. I remember Jobs at one point saying, "I'll walk into a meeting with the most passionate belief and I will walk out and talk to the rest of the company as if I never had that belief."
REID HOFFMAN:
Yes.
TOM GARDNER:
So, how do you create a network? How does a company that isn't LinkedIn -- how do they start deploying it?
REID HOFFMAN:
Well, there's a couple of different things. One is every employee has a network and you actually want to have employees have networks. Be active in the networks. One of the things we write in the book is to have some policy by which they can take people they know out to lunch, as long as they're reporting that intelligence back to the company.
It doesn't have to be a client. It doesn't have to be, "I'm recruiting you." I mean, those are obvious cases. Just someone who knows something that could be helpful for the company. I take you out to lunch. I learn [something] myself and expense it -- but that expense is part of reporting it back to the company. So, it benefits the company as well as me and so forth.
Another one is alumni. What people haven't realized is [as] a consequence of the fact that people now go and work at a number of different companies, [those] companies have large, very active, still-in-the-industry alumni that is a resource that is essentially just thrown away. They're like, "Well, you worked here. You should be grateful. You should just do things for us."
Well, they've got a new employer. They've got things to do for the new employer. It's not like that's their primary person that they're dancing with. And so, you can't just say, "Well, you should do things for us." No. It's a two-directional street. Part of what we talk about is how companies should essentially treat their alumni network as actually a set of people they still have a potentially really good relationship with and how they have a two-directional relationship.
For example, just last night we were having essentially an alumni event for LinkedIn alumni where part of the conversation was, "OK, what do you see going on in mobile? What do the next-generation apps look like? How are you seeing Android versus iOS?" And because these people are working at all these other different companies now ...
TOM GARDNER:
It helps [that] you not be as insular, as you're probably not already ...
REID HOFFMAN:
Yes ...
TOM GARDNER:
... because you're already a network. But it just reminds you that there are smarter people outside your company than you can ever have inside the walls ...
REID HOFFMAN:
And I got, actually, some really interesting insights for what the future of productivity apps are, because people working at these different companies said, "Oh, we should pay attention to this one and how that plays into a network." This all was last night, so I haven't gone and looked at them yet, but ...
TOM GARDNER:
[crosstalk 00:06:05] What about rotational, transformational, foundational? That experience that somebody at LinkedIn has when they're coming to work and they're [asked], "How are you going to transform our company?" What is the breakdown and how does somebody weave their way through a career at LinkedIn?
REID HOFFMAN:
We talk about three types of tours. Rotational is kind of like a fixed time. Generally speaking, the job ends, although you might continue [to] cycle in it. Transformational, which is the central one of the tours of duty, is a two- to five-year tour. It depends a little bit on the industry and what's going on where. My career should be transformed and the business should be transformed, and the two should be aligned. Fundamentally, everyone we hire starts on a transformational tour.
TOM GARDNER:
Starts?
REID HOFFMAN:
Starts on a transformational tour.
TOM GARDNER:
Oh, I would have thought it starts in rotational, orientation, boot camp ...
REID HOFFMAN:
No. Well, we have a few. We have the BizOps group. We have a few groups that have specific college interns or college graduate programs [where the] job ends in two years. At two years, we hope that you found another job in the company, but this job is over in two years. That's part of rotational.
Transformational. Say someone was hired in products and or was hired in engineering. [It's] come and do this. One of the questions our head of engineering asks people when they interview for jobs is, "What's the job you want after LinkedIn?" Because part of how we deliver on that transformational process is what's the job you're trying to get to?
Now, great people. We hope they work here a very long time. Part of being transparent about that is to create longer employment longevity -- but we are committed to transforming the people's careers -- because we want them to be committed to transforming our future. It's an alliance, which is the reason we named the book that way.
Then foundational. You get people who will [say], "This company's mission -- this is my mission. This is what I want my life to be about." And part of how you can tell the difference between foundational and transformational is five years from now, can you imagine working somewhere else? Yeah, that would make sense [is transformational]. Then you're on a transformational tour. If it's foundational, then, Oh, my God. This is the thing. I might be in a different job here at the company, but this is the mission that I'm on. That's foundational.
I think healthy, adaptive companies in the new world have essentially some foundational people. CEOs should almost always be on a foundational tour -- not necessarily all -- and then a transformational tour. It's a blend and a mix of them, because you get continuity through the foundational tours, and you get adaptability through the transformational tours.
TOM GARDNER:
What do you think is actually happening in other companies? What would be leading the 70% of people who say, "I'm not engaged. I'm not impassioned about this mission. I don't enjoy working for my boss." It's got to be something along the lines of, "I think I'll just have this same job forever. I may have had this education that pulled me in six different subjects and then I had sports and I did all these things.
"Now that I go to work here, all I do is pick up the phone and put it down. Pick up the phone and put it down. Pick up the phone and put it down. And that's my job, every single day, year after year." So, the idea of transforming something or rotating somewhere else in the business doesn't apply.
REID HOFFMAN:
Well, in particular, there's this major problem that [people realize once you point it out to them]. It's kind of [being] in a blind spot for most people. There's a massive erosion of trust between employers and employees because everyone knows, "Oh, you might go get a job somewhere else," but no one talks about it. No one says, "Okay. How are we helping you make progress -- even if that progress is somewhere else -- or that you might go take a job at another company?" It's a very rare conversation.
Yet, if you have that mutual lie of omission on both sides, where the employee is going to think, Well, I'm going to tell you what you want to hear, like I am really dedicated and I believe in the company, but actually I'm thinking about maybe my next step is there. Then [that employee is] inherently eroding trust. Likewise, as a manager, if you're [saying], "Well, I don't want to give you permission to think you can work somewhere else," well, it's not your permission to give.
TOM GARDNER:
It's a free world out here ...
REID HOFFMAN:
It's a free country. So, it happens by the absence of a conversation [that] trust degrades on both sides, which then also means you stop talking about what the future long term looks like -- what the belief is, where you're moving to, and [where] you're going.
Because if you're actually adopting a good management attitude, it's like, "Look. I am going to help you transform the trajectory of where you're going, but there's only a limited number of slots internal to the company." So, if I go on a promotion and you have six or eight people working for this person and they say, "Well, I would like to be that person," only one of those people is going to get that spot. What happens to the rest of them? Oh, we hope they just stay. Well, maybe some of them will stay, especially the ones on foundational tours, but maybe the other one ...
TOM GARDNER:
They need a new assignment. A new opportunity.
REID HOFFMAN:
Yes. And so, how do you make that happen? Now, if it's in the company, great. But a good alliance is, "I'm committed to you because you're also deeply ..."
TOM GARDNER:
So, a manager at LinkedIn ...
REID HOFFMAN:
Yes ...
TOM GARDNER:
... can be spending time helping one of their team members find a job somewhere else.
REID HOFFMAN:
Absolutely. I've done it myself. Always for longevity, you're trying to say, "Okay. Could we find something that would work for you here?" That's always a good question. No question. For example, take David Hahn, who we also talked about in the book. I had three conversations with David on each tour of duty saying, "Is the right thing to stay at LinkedIn or do something else?"
TOM GARDNER:
To be a venture capitalist.
REID HOFFMAN:
Yes. Well, actually, he's an Entrepreneur-in-Residence now.
TOM GARDNER:
Okay, right.
REID HOFFMAN:
Active VC. But then he came to me and said, "Look. I really want to run something." I was like, "Well, Jeff's doing a great job. He's in that job, so that's not available." We talked about it. I said, "No. There's a new, big mission you could do here at LinkedIn. That's not [really what your objective is]. You should go do that." He [asked me how he should do that]. We talked about it for a month or two. I said, "Well, you're not going to get enough clarity unless you're out. You should be in an organization, so why don't you come to Greylock and do it?" He said, "Okay. That'll work." And we had just an excellent transition.
TOM GARDNER:
What would have happened if he had said, "I want you to help me get a job at Facebook to create a professional network at Facebook?"
REID HOFFMAN:
Well, that would have been no, and that would have been a problem.
TOM GARDNER:
That would have been a problem.
REID HOFFMAN:
That would have been problem.
TOM GARDNER:
[Then], draw the line for me. What's the reason for that?
REID HOFFMAN:
The point of the alliance is we keep both interests in mind -- not just one. Both. For example, [if] I'm going to go create a professional profile on Facebook or anywhere else, it's like, "But, no. That's what we do here. You're harming the company. That's a statement in opposition and conflict. You have knowledge of our work and philosophy. That's actually a dishonorable thing to do. It dishonors all the investment that we've put in. The things that we've done together. That's not good. You should not do that."
But, for example, if he says, "Well, in fact, I want to go work at Workday," which does performance systems and account management systems, but LinkedIn has something to do with [00:13:15], that's fine. That's not trying to do the public professional identity. That would be like, "Great. Let's help you go do that." And are there edges between the companies? Okay, we might ...
TOM GARDNER:
But it's not a frontal ... It's not a company that is directly aiming at your business.
REID HOFFMAN:
Yes, exactly. And neither of us are aiming at each other's businesses. We might both have ATSs. Like they were doing an ATS and we're working on a bunch of other application tracking systems -- that's what an ATS is. That's fine. No problem. Workday is easy because also I'm good friends with Aneel, who is the CEO and all the rest.
TOM GARDNER:
It's an alliance. It's a shared ...
REID HOFFMAN:
It's an alliance.
TOM GARDNER:
No one side is going to be permissive and let the other one ...
REID HOFFMAN:
Exactly ...
TOM GARDNER:
... step in and take advantage or vice versa.
REID HOFFMAN:
Exactly. For example, companies should say, "Look. The individual matters, too. It's not just my interests." It's not like, "Well, it's only as long as it's good for my interests." No, no. Your interests, our interests, and how do we align them? That's the really key thing. And there's huge ground for that.
TOM GARDNER:
And you can pretty much guarantee -- I know the answer to this question, so why ask it [and] why waste our time -- but somebody who does leave to work for a direct competitor will not be in the alumni network.
REID HOFFMAN:
Yes. Exactly right.
TOM GARDNER:
They're not going to be distinguished alumni, and they're not going to be a part of the conversation about where the world's going and connecting and learning from what you're learning and sharing.
REID HOFFMAN:
And, for example, once you have a robust alumni network ...
TOM GARDNER:
You don't want to miss out on that.
REID HOFFMAN:
Yes. For example, when we had these hundred people last night, part of the value was all reconnecting with each other. We hosted the event [and] a huge portion of the time was actually them being able to say, "Oh, what are you doing now? What are you doing now?" It helps all of them. What they're grateful about is, "Oh, my gosh. You've given us an environment by which we can get back in touch with each other." One of them was saying, "Hey. Maybe you should come work at my company." That was one conversation I walked into. And that's all helpful to them.
TOM GARDNER:
So, network intelligence also helps you innovate, because new ideas come into the flow. How does that happen? Take, for example, Sales Solutions at LinkedIn. How did that idea emerge? Now, to me, as an outside investor, it makes total sense and I'm very excited about it. But as an outsider, it's difficult to see what the steps were that got there and how the network helps that.
REID HOFFMAN:
We have a very good reason to believe that every professional will have an active use case for LinkedIn -- one or more active use cases for LinkedIn. We're just building toward them. It's just a question of when. We have a category which we think of as "outbound professionals" which we know are the first people who, when they discover LinkedIn, they go, "This is better than chocolate for a business like us."
We knew that recruiting was going to be the first place, because it's such a hard problem and it's so important for companies and it's so important for individuals finding the right opportunities. And how do you make that a lot cleaner, like a network age product? Sales we knew, from the very beginning, was going to be another important area for us. This [goes] all the way back to when we were sitting around an apartment ideating.
TOM GARDNER:
2003. Sales was on the list.
REID HOFFMAN:
Yes. It was on the list. Now, the shape of it ...
TOM GARDNER:
That's an unbelievable thing, though, to think that the opportunity that sales presents -- you waited on for 11 years.
REID HOFFMAN:
Yes.
TOM GARDNER:
Now, as an investor, that's a very positive thing for me. For example, Harley-Davidson won't sell all the motorcycles it can. Chipotle won't open all the storefronts that it could right now because it's going to pace itself. It loves its existing business and it's not trying to please Wall Street's next quarterly demands.
REID HOFFMAN:
Absolutely.
TOM GARDNER:
But it's 11 years of knowing that you could have had additional growth. [That], "Hey, if we build recruiting out, that's going to be there."
REID HOFFMAN:
Yes. And the key thing is we think of the LinkedIn network as an ecosystem that has to [please all of the members]. We were like, "Okay. How do we put sales in, in a way that really works for the salespeople and works for the rest of the network?"
TOM GARDNER:
It could be painful for me. Everyone's tapping me. "Hey, listen. Your second cousin was my counselor in summer camp's brother and I was wondering if you wanted a new CRM solution at The Motley Fool?"
REID HOFFMAN:
And so it was important to build both the robustness of the network and the features into it that made that work for everybody. Look, always there's an occasional footfall here or footfall there, but on the whole, it's better for everybody. That's how we build the products.
Part of it was when we said, "What should our first thing be? Recruiting, sales or marketing?" Those are the three things to say. Those are the big ones that you do first. Because even though journalists use LinkedIn to find sources [and] hedge funds use it to find experts, those aren't the big categories.
TOM GARDNER:
Did you read Flash Boys, the Michael Lewis book? I don't know if you've read it.
REID HOFFMAN:
I haven't yet.
TOM GARDNER:
There's a section in it where basically they find all the high-frequency traders on LinkedIn. They're basically zapping on there. RBC figures out how high-frequency trading is happening and somebody inside RBC starts patching together all of the different developers and finance people on LinkedIn to show how that network ...
REID HOFFMAN:
Makes total sense. But the big categories are recruiting, sales, marketing. [00:18:25] We said, "Which one do we pick first? We'll pick hiring first. It's seriously broken. It's important on both sides -- important to the employer and important to the employee." And actually, [from] 2003, this is actually one of the things that changed. We [said we'd] do hiring, then we'd do sales, and then we'd do marketing. We're actually doing sales and marketing together, because we're like, "Oh, we actually have a lot of people now and we can actually work on both projects at the same time." But that's where it came [from]. Now, there was a lot of details. We hired an entrepreneur by acquiring a company who we thought could be the right lead for the project. There's a lot of things that come to ...
TOM GARDNER:
What was the acquired company? Okay, sorry.
REID HOFFMAN:
Talent ... Oh, God.
TOM GARDNER:
Just make an acronym up. CLJ.
REID HOFFMAN:
I think it was ...
TOM GARDNER:
But it was a talent business.
REID HOFFMAN:
Well, actually it was a CRM business that was started by two folks. And part of how we identified them was we were asking people who good entrepreneurs [are] here. We thought the product was good, but it was actually much more of who are the people who have the right stuff and most of that knowledge comes from outside the company. It's talking to various other entrepreneurs. People who work at Y Combinator, which is an incubator here. All of these kinds of things as a way of generating ... Oh, Sachin. He's the guy. "We should go talk to him."
TOM GARDNER:
The external network ...
REID HOFFMAN:
Yes.
TOM GARDNER:
... is more valuable than the internal network, do you think, over the next 20 years for LinkedIn?
REID HOFFMAN:
Well, they're both super valuable, but on any topic, the [smarter] people, the [deeper expert] people working outside your company and inside. So, if you're not tapping that expertise -- that diversity of opinion [and] how they solved other problems -- you're going to have a serious problem adapting at the right speed.
TOM GARDNER:
This is going to seem like a non sequitur, but I think I can segue this. What about succession at the highest levels of leadership? In the case of your creation and your team's creation of LinkedIn, you bring Jeff in. Succession at so many companies is a fail point -- or a struggle point. Starbucks' Howard Schultz comes back after seven years. Michael Dell comes back.
REID HOFFMAN:
Yes.
TOM GARDNER:
I don't think the transition at Microsoft [proved] to be a great one in the end. Although Steve Ballmer is one of the greatest chief operating officers in technology history, [it] didn't necessarily suit him to be the CEO of the company. There may be a succession problem at Apple. We don't fully know that story. It hasn't played out.
REID HOFFMAN:
I've met all the individuals in Y Combinator.
TOM GARDNER:
Yes, of course. But how do you think about why you got it right at the relatively early stage that you did and how do you think about succession for LinkedIn, obviously, or in observing any company and how they do it. I know that at LinkedIn, an employee who moves on to another job must provide a succession plan for the role that've moved out of.
REID HOFFMAN:
Yes, that's exactly right. To get longevity -- because the question is how you build companies that live for 100 years, 200 years -- [to] continue to be adaptive, continue to do things, one is you make it an internal function. So, you go down the manager hierarchy and everyone's identifying successors. They have already now. They have already in one or two years. They have an emergency. I'm hit by a bus.
TOM GARDNER:
[crosstalk 00:21:50]
REID HOFFMAN:
Yes. Kind of working it through. And sometimes you get [00:21:55] I'm not ready to go. Okay, what are we doing for them? Are they comfortable staying? Do they need a new tour somewhere else, in which case we have to start looking for someone. On a new one? All of these sorts of things.
Now, specifically in the CEO thing, one of the reasons this worked really well is I actually think a CEO-hiring process is a multiyear process by which you're spending a lot of time essentially looking for what is a later-stage co-founder. What you're essentially doing is [looking for] who has the talent. Who has the passion. Who has the product understanding of the area they're in. [Who] would [say], "This isn't a job. This is my life mission and I have all the things that would want to be brought in, not just as a CEO but as a later-stage co-founder." That's the thing that makes a great CEO.
TOM GARDNER:
I love that.
REID HOFFMAN:
One of the things, as I reflected back on it, is what I had been doing ... Because I had known that I'm actually a better product person or problem solver. I actually don't want to be a CEO. I knew that, and so I spent years talking to people. Like I spent years developing my list of, "It could be so-and-so, and it could be so-and-so, and it could be so-and-so." When it was like, "Okay, we need a person," I actually called five people and I set up dinner appointments.
I'd already been getting to know them. I already had a sense of what the right fit was. And Jeff -- I don't know if he said this on camera -- but he was the only person who was both ready now and [who] could be the person forever. Because I had a "ready now" list and a "forever" list and [he] was the only person who was on both lists. "Any interest? Because you can come and try it and see if you like it." And I was sold.
TOM GARDNER:
I guess he would be maybe in his late thirties at that point.
REID HOFFMAN:
Yes. That would be right.
TOM GARDNER:
One of the things I've observed in succession plans in companies is they often turn to the right-hand chief operating officer or the person that they've been working with for the last 25 years who, when they take over as CEO ... By the way, this is a real pain point for me, so this is like a personal therapy moment for me having this conversation. It's just I watch the succession happen and I'm like, "Why haven't we selected somebody? Twenty years of their career has yet to play out."
REID HOFFMAN:
Yes.
TOM GARDNER:
And they're their forever person. They may not be as proven, but he's got the team that can surround this person. That can set up a runway for the next quarter century of leadership.
REID HOFFMAN:
I actually think there are two classic mistakes -- that's one of them -- that's made in CEO hiring. One of them is, "Hey. This person's been here a long, long time. Steady hand at the rails." When actually one of the things that you're looking at is it's massively risky any time you change a CEO. It's like brain surgery. So, how do you also turn that risk into an advantage, which is how do you have the new blood? How do you have the vision for the next foundational tour of duty because given mortality and humanity -- all these things do go to, "Okay. It's only X time for that next cycle." That's one.
The other one is also that they tend to go, "Well, let's hire someone who's been a CEO before." In fact, that's usually not the right play. The right play is, "How do we find someone where it's their first time being CEO and they're really hungry to say, 'This is the thing I want to do.'"
TOM GARDNER:
Make my mark right here.
REID HOFFMAN:
Yes. So, for example, my conversations that I've had with Satya Nadella ... Initially it was, "Okay, I'm worried. Is it the safe, internal choice? But, oh. He's thinking boldly. He's asking lots of questions. He's got a strategy." And none of that is just like, "No, no. We're Microsoft. We know we've been very successful. We'll just do it more." It was, "No, no. I'm thinking really boldly about it." I was like, "That's a great first step."
TOM GARDNER:
There's a book entitled The Outsiders which studied the performance of eight CEOs over the last 40 years ...
REID HOFFMAN:
Interesting ...
TOM GARDNER:
... and they basically returned north of 20% a year over 20 years or more. That's how they were featured in the book. And Buffett's in the book ...
REID HOFFMAN:
Yes ...
TOM GARDNER:
... and Henry Singleton and Teledyne. One of the factors was they were all first-time CEOs. Maybe not all of them, but at least seven out of eight of them. That was a key point that was made. It's like they're bringing fresh eyes. This is going to be their career. There's not an exit ramp.
REID HOFFMAN:
I think sometimes it works to hire someone to be a CEO who's been a CEO before. But the default, when you talk to a recruiter, says do that. And actually, I think the default should be first time, and that's the exception. Sometimes the really valuable exception, but the exception.
TOM GARDNER:
As long-term investors at The Motley Fool, what we look at first, typically, is the culture. We look at [whether] this [is] set up for long-term success. The portfolio that I manage at The Motley Fool I'm mandated to hold for at least five years. So, it's a waste of time to think about what will happen in the next six months or to overrate valuation. It is obviously a factor in investing.
But The Alliance is the playbook, so maybe I'm just asking what I've already asked you. Why is LinkedIn a 4.5 out of 5.0 with something like 6,000 employees? And a CEO with a 98% approval rating across more than 700 employees that have taken the time to rate the CEO? I think he is the most highly rated CEO of a public company on the Glassdoor site. Why has that happened?
REID HOFFMAN:
Partially because Jeff's great. He focuses on a culture that has the characteristics of the alliance, which is how it is really great to work here. How is it that you feel like this is part of a progression of where you're going? That the whole transformational promise is actually delivered on. Part of it is that he focuses on how you help train leaders.
One of the things where Jeff has a deep skill bench, which is different than me, is I am a good partner to leaders. Jeff is a good trainer of leaders. Jeff is like, "How do I help you become the leader that you are? How do I help actually [impart] you're a great leader here but not here, and how do I help you understand that?"
TOM GARDNER:
[00:28:22]
REID HOFFMAN:
And love that. And make progress. That culture of how do you run an organization that's committed to the transformation, is focused on operating well, and has a real degree of openness but also attention to what that promise is in terms of how you make progress. How do you become more of a leader? How do you hold each other accountable in a compassionate way? It's [that] we are striving for excellence and we're making sure when we interface with other, that that's what we're doing. We're also doing it in a way that we don't have any people with anger management problems.
TOM GARDNER:
There's no one-upping here.
REID HOFFMAN:
Yes.
TOM GARDNER:
We're both on a mission. We're both passionate about the purpose. We're foundational. We're in the foundational zone if we're in leadership at LinkedIn and so typically a high performer in the foundational zone craves feedback.
REID HOFFMAN:
Yes.
TOM GARDNER:
Some companies think that they crave more money. But what they really crave is an inspiring challenge and a great group of people to work with and feedback for what they can do better and what they're not good at.
REID HOFFMAN:
Yes. All of that and also the sense of meaningfulness about what I'm doing. Like this work? This matters. Like what I do? This matters. And so that's another part of leadership.
TOM GARDNER:
A personal question for you. What matters to you right now? I think from the journey that you've had, what a remarkable last 20 years.
REID HOFFMAN:
Yes.
TOM GARDNER:
I mean, what a remarkable life.
REID HOFFMAN:
Eh ...
TOM GARDNER:
But what is it that is motivating you now that might be unique or different than what was driving you 10 years ago? Or is that purpose and value consistent ...
REID HOFFMAN:
There's a consistent framework. What I think a lot about is how we make massive systemic improvements to society at scale. The language I use is designing human ecosystems. Technology is the leverage point for that. So, creating networks or marketplaces, these kinds of things, are the ways to do that. It's been intensely, for the last 20 years, within the commercial realm and still is, within LinkedIn.
Although, for example, we focus a lot on what we call LinkedIn for Good, which is how do we help veterans get jobs? How do we help students? Yes, it has an economic impact, but we invest in them disproportionately to the economic impact. It's [about] how we have the whole system be better and how we make sure that the society is better off for that. And we're really good at that.
Another one is how we help professionals, through LinkedIn for Good, find micro volunteering opportunities so that they can take their expertise and actually apply it within the change-world area and how to have that matching work well.
Then I also begin to think about now that I have this awesome platform of LinkedIn as a network -- [with] my identity, also, as a venture capitalist at Greylock Partners -- how do I then begin to apply that in ways that were tools that weren't available to me before?
I was having a conversation with Todd Park, who's the CTO of The White House, in reference to technology bringing cost efficiencies. There should be a lot more good technology deployed within government. Providing services. Making it better and more cost effective. How do you do that and how do you navigate the political processes?
One of the things that Todd mentioned to me was, "How do we get more good engineers to focus on this problem?" I [said], "Look. You're a star. Why don't we get some other stars and we'll do an event here. And we'll get the engineers who are interested to come to it and [ask what we can do]. We'll have a set of conversations with them."
He said, "Will you do that with me?" I said, "Sure. Of course, I'll do that with you." I'm on the board of Mozilla and I'm sure Mozilla would love to do this, so we'll do it at Mozilla. That kind of thing was probably a tool that wasn't in the tool chest, as much, five years ago, because it's a result of LinkedIn's success and Greylock's success and these sorts of things.
TOM GARDNER:
What do you think of Wall Street's financial services industry? Our position, our vantage on it is incredibly short term. The commission structure is set up in a disadvantageous way for clients. Many of those clients are passive investors that are unclear about the relationship that they're getting into with a financial advisor. And that advisor ought to be able to be automated ...
REID HOFFMAN:
Yes.
TOM GARDNER:
... I think just like a driverless car.
REID HOFFMAN:
Yes.
TOM GARDNER:
Your entire financial life -- these are rules-based. It's not that complex to get people to pay their credit cards off. Get a passive index fund. If they want to buy stocks, they can beat the market with The Motley Fool. Awesome. They get insurance. Their mortgage. Why is there so much inefficiency still in financial services when financial services has been investing in tech companies? There seems to be such a movement within those two industries and yet we still sit in the face-to-face advisor-led, commission-led structure.
REID HOFFMAN:
I think the dysfunction is that the majority of people don't actually understand how much a leveraged fee structure makes it very difficult to do. And they're so uncomfortable with the product area, they just want to have someone talking to them about it. You're like, "You realize that's reducing value -- not adding value." As you know, I'm an investor in wealth funds through Greylock. Generally speaking -- except for the very specific things that I do where I'm expert at them -- I generally park things in low-fee ETFs and so forth. That's the way to go long and over time.
When friends of mine ask me what [they] should do, I say, "Wealth funds. ETFs. And if you do specific investing, make sure you're an expert at it. Make sure you know what you're doing." Because if you do it casually, the likelihood is it's terrible. And if you just outsource it to someone else, then the macro question is, in terms of their investing with your money, if they were so great at it, why aren't they just running their own fund? Why are they investing your money?
TOM GARDNER:
Our Motley Fool principle is we have skin in the game, too.
REID HOFFMAN:
Yes, exactly.
TOM GARDNER:
That's a [key point about financial relationships made by] Nassim Taleb, The Black Swan author. Are they putting their money behind their own advice? If they aren't -- which is not happening in most cases -- you can virtually guarantee that that's going to be a subpar result after fees and after taxes.
REID HOFFMAN:
Exactly right.
TOM GARDNER:
So, the passive indexing or skin in the game component ...
REID HOFFMAN:
I 100% agree.
TOM GARDNER:
You want to know that Warren Buffett ... And that's why we love the founder mind-set at companies that you talk about in The Alliance and the founder-led businesses. That's why parking your money with that founder -- whether it's the Starbucks leader or the Facebook leader or the LinkedIn leader -- is a great way to invest.
REID HOFFMAN:
And you guys do great content. As I told you, one of the reasons I'm here is actually I love your content. I actually read it every so often.
TOM GARDNER:
Reid, what do you think about valuations right now? We have just a few more questions.
REID HOFFMAN:
Complicated ...
TOM GARDNER:
Valuations in technology. You look back to 2000. Obviously, it's unfair to do that in some ways, but you look at companies like Microsoft, Intel and Cisco. They had great cultures. They had outstanding growth rates. Balance sheets. Everything looked beautiful for them and then they became very poor investments over the last 15 years. Very poor is a strong statement. They weren't great places to have your money once they had ascended to a very large market cap, high-multiple tech company. Do you fear that in technology now?
REID HOFFMAN:
Well, it's complicated. The fundamental way I look at stock prices is they're options on the future. Even in the value stocks -- not just the growth stocks -- I look at them as they're essentially options on the future. What happens is people try to tell themselves it's all more scientific. They do DCF analyses. They do all these kinds of things. But really part of the question comes down to where do you think the company is going to be in three to five years. That's kind of the fundamental thing.
Like everyone [says], "Well, these tech valuations are out of whack." [It's] because there's a subset of these tech companies. They're not all tech companies. There's a whole bunch of tech companies that do not trade the way these [do]. Like, "Oh, my God. Look at this one." It's almost like a wisdom of the crowds or madness of the masses -- depending on which one it is -- on a collective view of what do we think the future of this is. Where do we think it goes? It's not actually on a, "Well, shouldn't you value it on the following CAGR and everything else?"
TOM GARDNER:
Don't you think you would have said this about Cisco 15 years ago? The future is networking and look at their balance sheet. Look at their growth rates. They've got their leadership in place. I don't see what could go wrong for that business at 40x earnings and their $400 billion market cap.
REID HOFFMAN:
The reason it was working then is that they had a very good engine going. When the new tech came along, they would buy it. But there was actually new hardware and networking tech that was coming along that if they didn't buy it, that that would create a threat to their business. And they had a great culture. And they were doing that really well. They were the poster child of the playbook to learn to do that. As that rail began to go off, that was a little bit more [of a] challenge.
So, it's not always, "Oh, they're killing it now" means they'll kill it in the future. You have to think about what's going to come along ...
TOM GARDNER:
What is the future?
REID HOFFMAN:
Yes. And is the networking hardware going to be the key thing? Or is the networking hardware going to be here or is the strategy brittle on someone else building the next thing? For example, one of the things the mobile ecosystem opens up is people replace a mobile phone about every two years. That means that the turn rate on how drastically the market share could shift ...
TOM GARDNER:
If Apple can ascend the market share so incredibly rapidly, it means somebody else can, too.
REID HOFFMAN:
Yes, exactly. So, you have to think about what's the volatility of that?
TOM GARDNER:
And you would look at LinkedIn and say, "It's pretty well insulated from competition because of the network."
REID HOFFMAN:
Yes.
TOM GARDNER:
There's not an immediate network effect. There are app developers and there is that in the iPhone market or the smartphone market -- but not as deeply embedded as the network relationships you get in a LinkedIn or maybe in a Facebook.
REID HOFFMAN:
Exactly. Network properties -- when you have a network -- the network could be eBay or Marketplace. The network could be Airbnb. The network could be Facebook. The network could be LinkedIn. Network properties have more resilience.
Now, you always have to be [thinking] that there could be a new thing coming along and we want to be the new thing. We have to be thinking about how do we build the new thing? And if you're not thinking that way ...
TOM GARDNER:
What's the number one metric -- to the extent there is one in your mind -- for tracking whether a network is gaining vibrancy or declining in relevance? GeoCities. There must be a tripping point there, obviously. MySpace. For me, one of the things is succession transition. I don't know that MySpace wouldn't have succeeded far more than it did if it had its founder/leaders leading all the way through.
REID HOFFMAN:
MySpace had a great platform. There was a time where Facebook versus MySpace -- it was a very open question.
TOM GARDNER:
Yes. So a network is beginning to lose relevance when this happens ...
REID HOFFMAN:
More or less, the growth curve can go through high growth and low growth, and high growth and low growth. If you're at all in a decay, the decay can go at the same speed that the growth goes at. So, you're kind of looking at is the growth [at an end]?
I forget what the public numbers for Facebook [are], but say it will get to 1.3 billion monthly active users. Well, maybe you're growing as fast as the Internet's growing at that point and the fact that it's not growing is not actually a problem. But if you actually begin to see serious drop-off, then you begin to go, "Okay, that will compound that way, too."
TOM GARDNER:
I want to throw a few one-liners at you to end. You can answer them as briefly as you'd like to. They're just one-liners tied to The Alliance and they're relatively unique takes you have, I know. What would you say if somebody -- we have many entrepreneurs in the Motley Fool community -- said, "I tell everyone that works at our company that we're a family."
REID HOFFMAN:
Oh. I would say it's a serious long-term mistake, and the reason it's a serious long-term mistake is because what you're creating in people's minds is that we are loyal to each other above everything else. For example, you don't divorce your brother. You don't fire your brother or your child for performance things. And yet, you will do that in the right circumstances. What [are] the needs of the business? How are you performing? Those really matter.
We suggest "team." That we're a team and we have the loyalty of the team. We have the emotional connectivity of the team. We have the trust of the team. You need all these things on teams and we have that. But we have this performance metric that isn't like, "Oh, you can trust us. It's all great." It's a cheap trust that ultimately will break, and when you break it, it's going to be seriously painful.
TOM GARDNER:
A CEO of a company in New York City -- actually one of the most highly rated companies on Glassdoor. A small company, about 80 employees, called EliteSEM. Their CEO, who I met with about six weeks ago, said, "Whenever somebody at our company tells us that a headhunter called them, we give them a bottle of wine."
REID HOFFMAN:
Uh-huh. Yes.
TOM GARDNER:
And we do that because we want to celebrate that their value is going up in the marketplace and that the trust is built between us that they came over and said, "I got another headhunting call." We get him or her a nice bottle of wine. Good idea or bad idea to think that way?
REID HOFFMAN:
Great idea. And great idea because it has an open, honest conversation. Because that should be paired with conversations about where you're going, what's your transformational tour of duty and all the rest of the stuff. But the [openness] and honesty and trust of it is awesome.
For example, one of the things people realize is that every single employee on LinkedIn has a super complete, deep LinkedIn profile, because that transformation going out in the world -- that's the way the world should operate. [It's] is the way that LinkedIn operates.
TOM GARDNER:
Teamwork hurts the highest performers. They're dragged down to have to help other people who aren't performing at as high a level. What do you think of that?
REID HOFFMAN:
That doesn't scan for me.
TOM GARDNER:
I'm not asserting that. I'm just throwing one-liners at you to get your attention. This is free association day.
REID HOFFMAN:
Oh, no. It's all good. The question is if you haven't had the right team composition and you actually are allowing people who shouldn't be on the team to be on the team and that's causing friction -- you can have a problem there. So, keeping each other to a high bar in terms of what you're doing and how the team operates is extremely important.
Now once you have that, team members will have different skills and strengths. And sometimes to bring them along -- because they're great at this but they're not great at this, but you have to help them work on this as you're doing that -- but you do that collectively because it's a team. And functioning as a team is powerful. Sometimes you have younger members that you're training up and you're helping, and that's part of what you're doing. So, there's all of those sorts of things that are really important.
Where actually a stellar team member may be helping others, it may have a small productivity because, look. The hour that I spent doing this -- I could have been doing that. But you have to focus on the output of the team over time. Great team members -- great team leaders -- are what's the output of the team over time, and that's the way you have to think of it. Now, you also have to think about not just the team, but me. While my output is being seriously blunted, we have to reconfigure in order to make that work.
TOM GARDNER:
I co-wrote a LinkedIn Influencers article with the captain of the women's soccer team at the University of Michigan and she says, "Our mission is to help the teams of the future."
REID HOFFMAN:
Yes.
TOM GARDNER:
We want to have an incredible year this year. Don't get me wrong. We want to be awesome this year. But we're trying to set our teams up for the next three, five, ten years at Michigan.
REID HOFFMAN:
Yes, exactly.
TOM GARDNER:
Technology is won by the best ideas and the best strategies -- not by the best cultures with the best people.
REID HOFFMAN:
It's complicated. It's certainly ideas and strategies matter a lot.
TOM GARDNER:
Rank those for the fun of it. I mean, I don't know how much you can divorce any of the four from each other, but maybe that's the point. You want to have an A-plus culture ...
REID HOFFMAN:
If you have such a great technology and strategy, you can implement it with a bad culture. It has happened.
TOM GARDNER:
Which is less likely if you have an awesome culture with great people but a terrible strategy.
REID HOFFMAN:
Yes, probably. If you have a terrible strategy and a great culture, it probably won't work, although you hope that your great culture will get you the people that will fix your strategy. This is one of the reasons that network intelligence and everything else is important, because knowing where the puck's moving to is really important in making these bets.
Now, you have to be able to skate to the puck. You have to be able to skate to the puck as a team. You have to be able to recover from failure -- all of which makes culture very important. But the transformation that is brought about by technology at an accelerating pace is you have to be adaptation rather than pure efficiency. Now efficiency is important, too, but adaptation is cardinal for the future.
TOM GARDNER:
It is more important for an employee to have an awesome external network and for all the employees to have awesome external networks than it is for a company to be deeply concerned about its proprietary information.
REID HOFFMAN:
Yes.
TOM GARDNER:
Yes!
REID HOFFMAN:
I think that's exactly right. It's not to say you don't have secrets. It's not to say you trade secrets or anything else. Or not to say you have plans that you don't want to share and you don't want to publish. Part of what we distinguish, actually, in The Alliance, is nonpublic, non-secret information that actually can be useful. There will be [times where I say], "Here's LinkedIn's analysis of reputation systems."
Yes, it's information that we've built that I'll be talking about to someone else. But I'm talking about [it as] here's something that will be helpful to you that is not breaking any confidentiality rules. It's not saying anything about what LinkedIn's sales are doing or what LinkedIn's secret strategy plan is or any of those sorts of things. But it is information we built and we invested in, and we don't publish it because we don't see any value to publishing it. But I'll share it with you as I'm talking to you because then you'll also share similar kinds of information with me.
TOM GARDNER:
Which happens among investors all the time.
REID HOFFMAN:
Yes.
TOM GARDNER:
In fact, I would say that a member of the general MorganStanley team that worked, in part, on the IPO after you had gone public at LinkedIn said to me, "This is my favorite company to go through the IPO process in MorganStanley, period, in any industry, because I love their leadership team and I love the B2B, B2C. I love the dynamics of that economic model." And although I hadn't launched my portfolio, yet, and although LinkedIn was going to be a hold in it, that conversation with him caused me to keep adding to LinkedIn repeatedly, which is, of course, a key move as an investor, to add to your winnings.
REID HOFFMAN:
Yes, exactly.
TOM GARDNER:
If you reaffirmed, don't be worried that you're moving your cost bases higher.
REID HOFFMAN:
Yes, exactly. Double down on the things that you know are winners. And I wasn't saying anything specifically about LinkedIn ...
TOM GARDNER:
I know that. As a LinkedIn shareholder, I want to know that you're going to just continue to be part of LinkedIn in a big way. Do you see other big LinkedIn entity companies outside of LinkedIn that you'll be starting?
REID HOFFMAN:
Oh, no. No, no, no.
TOM GARDNER:
Got it. Okay, right. You're a Greylock investor. Married with great satisfaction. And you're an executive chairman at LinkedIn with great satisfaction.
REID HOFFMAN:
Yes. So, the reason we're here today is that a majority of my working days are in this office.
TOM GARDNER:
Love it. Reid Hoffman, the co-author of The Alliance. Thanks so much for spending time with us. I did want to confirm one last little thing that I read on your Wikipedia page. Is it true that you made one of the earliest investments in Facebook?
REID HOFFMAN:
Yes. Actually, I intro'd it to Peter and I was part of Peter Thiel's round.
TOM GARDNER:
Just one great investment after another. Any time you want to join our investment team, please let us know.
REID HOFFMAN:
Thank you very much.
TOM GARDNER:
Thanks very much.
REID HOFFMAN:
It was a pleasure.
[End]
