Source: The Wall Street Journal
For a stretch of asphalt that has seen trillions of dollars of wealth creation, Sand Hill Road in Menlo Park, Calif., the Main Street of venture capital, is rather unassuming. A few bikers heading for the fog-covered hills, a Tesla passing a Prius, low-slung office buildings. One building houses Greylock Partners, where I sit in a conference room with entrepreneur Reid Hoffman, who has been in the middle of this wealth creation and now sees some of its destruction coming soon. “If companies haven’t embraced that they are operating in a networked age,” he says, “then they will probably be on their way to not surviving.”
The 47-year-old knows networks. Mr. Hoffman built his reputation by founding the business social-networking platform LinkedIn and serving as chief operating officer of the e-commerce site PayPal, both billion-dollar powerhouses. He was an early investor in YouTube, Yelp, Flickr, Zynga and, oh yes, Facebook.
He has a theory on what makes ventures work: understanding that information is no longer isolated but instantly connected to everything else. Call it the move from the information age to the network age. Mr. Hoffman thinks that the transformation is just getting started and will take out anyone who stands in the way.
But what is a network? It’s an identity, he explains, and how that identity interacts with others through communications and transactions. It’s not just online, on Facebook and Twitter, but everywhere. It is the sum of those communications, conversations and interactions.
“Your identity is now constituted by the network,” he says. “You are your friends, you are your tribe, you are your interactions with your colleagues, your customers, even your competitors. All those things come to form what your reputation is.” In short, you are no longer the only one in control of your résumé.
Mr. Hoffman, who grew up in the Bay Area, has long been an independent guy with a contrarian spirit. After beginning high school in Berkeley, he applied and was accepted to boarding school in Vermont without telling his parents. He returned to the West Coast to attend Stanford University, which he felt best combined the intellectual and practical. A Stanford adviser told him to look through the course catalog, see what he liked, and only then pick a major. He chose Symbolic Systems, the same course of study Yahoo CEO Marissa Mayer pursued a few years later. Symbolic Systems, he explains, is basically “how we think and speak, how we communicate with each other, how we reason—really, who we are.”
In college, he spent a year interning at the renowned idea factory Xerox PARC, and after graduation in 1990 he studied philosophy at Oxford University on a Marshall scholarship. Both experiences, he tells me, influenced his thinking about how people communicate. But he didn’t like the narrowness of academia and the lack of practical application so gave up life as a scholar.
Yet he still wanted to understand people and shape how society communicates, and he thought “the way to do that might be to create media objects that people interact with, and cause them to interact with each other.”
The time was ripe for such rethinking: In the early 1990s a task as simple as storing contacts and appointments electronically was still a mess. The day’s technology, as “those of a vintage will remember,” was personal information managers or PIMs, a type of electronic organizer that looked more like a graphing calculator. PIMs presented an opening for entrepreneurs interested in how people store data and use it to interact with others.
Mr. Hoffman had his own idea for a PIM concept, but raising money proved tough. He got his first taste of venture capitalists in 1994 when he tried to find funding: “You probably should go learn how to launch software,” potential investors told him.
So Mr. Hoffman joined Apple. He was hired as a project manager in 1994 to help build something called eWorld, an online platform that offered email, news and other services. The Netscape browser was floating around at this point, and Mr. Hoffman hoped Apple executives would pursue similar open Web concepts, tools for browsing rather than closed systems like eWorld. Management didn’t listen, and Mr. Hoffman was left feeling “doubtful you can do bold new projects inside big companies.”
But more than ever, he says, he was convinced that an interconnected age was coming and would be driven by the proposition: “How do we lead better lives in the ‘real world’ with the electronic world as kind of an overlay?”
He had already begun to work out an answer. “I had some of the ideas of what was needed for a networked age: profile, matching functions, ability to control who you communicate with.” Now he needed the right platform. In 1997 he founded SocialNet, a concept with all his key elements but one that focused on the already crowded dating market, matching people with similar interests. “I learned I needed to find something that’s fairly contrarian,” he says.
But the venture wasn’t a loss in at least one regard. “During the time I was doing SocialNet,” Mr. Hoffman says, “my friend and Stanford classmate Peter Thiel and I were taking walks. I never learned so much.” Mr. Thiel was among the founders of PayPal in June 1998, and Mr. Hoffman joined the young online-payments company in January 2000 as his friend’s right-hand man, agreeing to do a “tour of duty” to help fix some problems and then sell the company. Mr. Hoffman says he realized quickly that PayPal was just networked money that operated outside proprietary credit networks.
PayPal kept growing and in 2003 sold to eBay for more than $1 billion. Mr. Hoffman’s stake freed him up to build his dream platform, focusing on reputation and identity while adding communications, allowing the digital world to finally be an overlay of the real world.
So he created an electronic overlay of the professional world. Until then, people stored their professional backgrounds on résumés—education, former employers, activities and maybe a reference or two that someone in a human-resources department might bother to call. He wanted to take the résumé digital, but that was just the beginning. As in the real world, he sensed, your true reputation is what everyone else thinks of you.
He started LinkedIn in his living room in December 2002 with a couple of SocialNet colleagues. Other PayPal executives put up the early funding, and the venture-capital firm Greylock Partners eventually jumped in. The site quickly became the go-to place for hosting résumés. The networked age was under way at other places, as Facebook and eBay grew, but LinkedIn professionalized it. The site united knowledge and power: Job hunters knew where to look, and employers could be connected to workers with specific skill sets.
Unlike PayPal, LinkedIn seemed to have a smooth start, but Mr. Hoffman says otherwise: “Oh, the problems were similar.” For one, “having a professional identity, doesn’t that mean you’re disloyal to your company? You’re looking for a job?” Human-resource departments liked that the platform made finding potential hires easier but didn’t want to lose the talent they had: “They would prefer their own employees are completely undiscoverable to the world.”
Companies also resisted at first, and a few had “spasms,” as Mr. Hoffman puts it. “In the very early days, Nokia banned LinkedIn because they said your title was company internal information so you couldn’t publish that. To show you the power of the networks, 22 people resigned and usage at Nokia continued at the exact same rate as it was before. Employees would just use it at home.”
“Investment banks,” Mr. Hoffman says, declining to drop names, “had the problem that all messaging had to be monitored internally, for stock or financial information and compliance.” So they turned off LinkedIn, blaming compliance as an issue. It didn’t stop employees from using LinkedIn. “People would go home and use it in the evening.”
But Mr. Hoffman thinks that corporations still haven’t figured out how to use LinkedIn and other platforms to their advantage. “All companies are being affected by globalization. All companies are being affected by technology disruption. Which means the innovation and adaptation cycles are getting shorter and shorter.” How do you make your company more adaptive? “The answer is you need adaptive people working for you. It’s much better for the company and much better for the employees—it accomplishes a network effect,”
Finding these adaptive employees is one thing, keeping them is another. LinkedIn forces companies to work at that. “What everyone knows,” Mr. Hoffman says, “is that when you hire someone, there is a good chance they will eventually work for someone else. Employees know there is some chance the job they have will go away at some point.” As a result of this worry, people shop themselves to other companies, a hedging strategy that LinkedIn makes easy. “That doesn’t allow you to invest in the future. You need to keep employees progressing on their career.” This investment in human capital is a big part of the network age.
Mr. Hoffman talks of a new contract, an alliance. “Alliance,” not coincidently, is the title of his latest book. “For individuals, it’s trading lifetime employment for lifetime employability. The company should invest in you to keep you employable,” by always offering more training and expanding responsibility, even if you never leave. Employees, in exchange, “will work to keep the company adapting and valuable and growing over the long term.” Adaptive employees keep companies vibrant, but those same employees are much more likely to stay if they know they’ll get to keep adapting, gaining responsibilities and expertise.
But will all this have staying power? We’ve seen plenty of fads out of the tech world. MySpace or Foursquare, anyone? LinkedIn, for now, seems to have a tiger by the tail. In April, the site hit 300 million users.
Even Facebook, with a billion users, is losing its cool factor with younger users. But Facebook’s embedded-in-the-culture quality ensures that it is likely to have a long run by Silicon Valley standards. LinkedIn may be on a similar path, given how ingrained in corporate culture it is becoming. That, plus the fact that its competition remains largely an old-style mix including headhunters and help-wanted ads. Companies now pay to attach to LinkedIn’s network: Sales grew 46% in the first quarter 2014 over the same period last year, and they are approaching $2 billion annually.
The new reliance on how information travels in networks will create many winners, but also losers, namely those companies that can’t or won’t keep up. “It’s how everything operates: communications, employment, transactions, finances. In 20 years, if you’re not operating your strategy in these domains, with deep understanding that we are living and working in a networked age, then at that point, you’re the Dodo bird.”