Acquiring proven entrepreneurs is a smart way to innovate

Nearly every company understands the urgent need for innovation. Technology and globalisation have so accelerated change that scale and power — once the greatest strengths — have become weaknesses because they impair an organisation’s ability to adapt. The problem is, the term “innovation” is used so broadly that it has become virtually meaningless.



Consider the typical initiatives that companies pursue: some create labs to innovate, yet most labs fail to help companies adapt to the future. Others try methodologies such as the “lean start-up”, but find it difficult to act on potential breakthrough ideas. What these failures have in common is that they do not focus on the right talent.

To innovate successfully requires entrepreneurial talent, which is not simply being creative, smart and flexible. What sets entrepreneurs apart is that they envision a future that defies conventional wisdom, then assemble (and reassemble) the plans and resources needed to make it a reality.

You cannot teach this by sending your people to a two-day workshop; these skills come from months and years of hard-won experience. It is also incredibly difficult to hire this kind of talent; no entrepreneur worth his or her salt is looking for a traditional job.

In Silicon Valley, we have overcome these issues by using acquisitions to bring in innovative, entrepreneurial talent. I am not necessarily talking about “acquihires”, in which technology companies acquire start-ups as a recruiting strategy. Rather, you are trying to acquire leaders who have proven their ability to build a new business. Unlike most other skills, there is no academic degree or job title that can accurately predict this.

Even when you have identified one or more great entrepreneurs you want to acquire, you need to adopt a different approach to M&A. It is not simply a matter of buying the “right” company at a good price. The real challenge is finding talented entrepreneurs who are aligned with your mission and can function within a larger organisation. You have to make sure that the body does not reject the transplant.

At LinkedIn, we used acquisitions to fuel innovation when we acquired Pulse and Newsle. Both had built killer products. But we also wanted to transplant their entrepreneurs (and the future innovations they would create) into LinkedIn — Ankit Gupta and Akshay Kothari at Pulse, and Axel Hansen and Jonah Varon at Newsle.

Similarly, our business lines — talent, marketing and sales solutions — are run by acquired product leadership (Eduardo Vivas from Bright.com, Russell Glass from Bizo and Sachin Rekhi from Connected).

To retain acquired entrepreneurs, you must build strong alliances with them based on closely aligned values and missions. In my book, The Alliance, my co-authors and I wrote about the importance of building open, honest and mutually beneficial relationships with employees. Each key employee should be on a “tour of duty”, which includes a clear objective (with agreed success criteria) that would help transform the company and the employees’ career. The same principles apply to any entrepreneurs you acquire, though their “signing bonuses” may include a few extra zeros.

When LinkedIn acquires a company, we work with the entrepreneur(s) to define a tour of duty that advances their career. Given the financial rewards they have already received, these tours focus less on compensation and more on learning opportunities.

For example, Ankit, Akshay, Axel and Jonah all came to LinkedIn with relatively little work experience; Ankit and Akshay had just finished their graduate degrees at Stanford, while Axel and Jonah were Harvard dropouts. Eduardo had jumped right into the start-up world after high school, and sold another company before building Bright.com, but had never worked at a business of our scale. Working at LinkedIn gives these entrepreneurs the opportunity to manage a far larger team, with a far greater user base — experiences that will help them advance to executive roles or to start new businesses, whether inside or outside LinkedIn (preferably inside).

Executed properly, bringing in entrepreneurial talent via acquisition can be a major win-win. Your business gets a much needed infusion of innovation, while the entrepreneurs you ally with benefit both economically and by gaining valuable experiences that advance their careers.

This post originally appeared on Financial Times.

The World’s Bank: How Crowdfunding is Disrupting Old Banking

In San Francisco, Teresa Goines is breaking down deeply entrenched cycles of poverty and crime, one bowl of peanut butter stew at a time. Old Skool Café, the 1940’s supper club she started, gives jobs to at-risk and former gang youth. When banks turned her down, 41 people she’d never met crowdfunded a $5000 loan, putting their faith and money in Teresa, a former corrections officer with no restaurant experience in a city where most new restaurants fail. Their bet paid off. She repaid her loan in full. Each year, 25 troubled young people, most who have tangled with the law, get their lives back on track. Today, Teresa has an even bigger dream of opening Old Skool Cafes across the nation and revitalizing communities everywhere.

As high-tech investors, both of us obviously value high-impact, fast-growth companies that attract massive global user bases. Such companies can scale quickly, create thousands of jobs, and help the U.S. improve its export economy at a time when its share of global economic output is falling. But we also recognize that most businesses are small businesses. Indeed, out of the roughly 27 million businesses in the U.S., 21 million of them have no employees – they’re sole proprietorships. And approximately 4.6 million of the 5.9 million businesses that do have employees have nine or fewer.

Thus, small businesses are a crucial component of the American economy. Yet when people like Teresa Goines try to create new businesses and jobs, banks shy away. According to Biz2Credit, an online devoted to small business funding, big banks currently reject more than 8 out of 10 loan applicants, and small banks reject 5 out of 10. Some estimates suggest that investment in small businesses has dropped as much as 44 percent since the Great Recession in 2008. That’s tens of billions of dollars that fueled the economy and helped our communities thrive – gone, completely eviscerated. Meanwhile, twenty-one million people are underemployed or unemployed. Globally, it’s far worse, with half the planet’s population living on less than $2 a day.

While talent is universal, opportunity is not – even in the land of opportunity. The greatest threat to our long-term prosperity goes far beyond the financial crisis and the health of a few banks on Wall Street that have been deemed “too big to fail.” The real threat we face is a global opportunity crisis. In both the developing and the developed world, billions of people don’t have access to jobs and capital.

That’s why we’re on the board at Kiva, the pioneering crowdfunding platform where citizen lenders invest small sums in micro-entrepreneurs all over the world. Nearly 1.3 million borrowers like Teresa Goines, living in 76 countries, including the U.S., have received more than half a billion dollars in loans. 99% of these loans have been repaid in full, flying in the face of traditional banking assumptions about credit and trust.

Kiva is no longer unique. Today, an exploding crowdfunding sector is making billions of dollars of capital accessible to upstarts and entrepreneurs. Over 700 crowdfunding marketplaces, led by the likes of IndieGogo, Kickstarter, and Lending Club, are democratizing access to capital, fueling entrepreneurship and innovation, and profoundly changing the face of philanthropy at unprecedented scale and impact.

Citizens Lenders Democratizing Access to Capital

One of the best ways to fuel widespread prosperity is by helping Main Street invest in itself. Crowdfunding relies on the wisdom of crowds to identify fund and unleash entrepreneurial innovation far more efficiently than the credit rules of banks can.

Call it the emergence of a “world’s bank” – a system built by and for the people, delivering credit in America and across the globe in a radically decentralized, highly scalable, and crucially equitable way.

The World Bank funds institutions. The world’s bank funds people. For decades, the World Bank has existed as a top-down mechanism to spur economic growth in developing nations. In contrast, the world’s bank picks up with a nimble, bottoms-up model that is far more attuned to on-the-ground needs of micro-entrepreneurs and their communities worldwide.

The motivations for citizen-lenders run the gamut from altruistic to creative to financial. Kickstarter and IndieGogo funders typically get some type of reward in return for their capital. Kiva lenders are paid back by micro-entrepreneurs, albeit with no interest. Services like Lending Club offer lenders a way to earn interest on personal loans.

In the same way that citizen journalists have shaken up Old Media, citizen lenders may upend Old Banking. Already, Lending Club has made $4 billion in personal loans in the U.S. alone. Kickstarter lenders have applied over $1 billion to more than 60,000 projects in just five years. More than 60 projects obtained at least $1 million in funding, and one attracted over $10 million. There are over 1 million Kiva lenders residing in 198 countries. Finally, a new change in federal regulations has opened the market for equity crowdfunding, further empowering innovative entrepreneurs via marketplaces like AngelList and CrowdFunder.

Still, it’s easy to underestimate the impact of crowdfunding, dismissing these purpose-driven marketplaces as a simplistic way for do-gooders to easily support pet causes, yet incapable of driving massive structural change that can improve prosperity for all, not just a select few. The opposite is true.

The Surprising Sophistication of Crowdfunding Platforms

Crowdfunding can easily go where traditional banks cannot. Take Erastus Kimani, a 73 year old schoolteacher turned entrepreneur, who lives in a remote part of Kenya without indoor plumbing, much less indoor banking. Erastus attracted lenders from all over the world. They crowdfunded $1700 which allowed him to triple the production of his ceramic stove liner business. Using just his mobile phone, Erastus applied for, received, and paid back his loans in full. He did it all without bank officers, ATMs, or even a computer.

More broadly, crowdfunding is a sophisticated and pragmatic expression of democratic values and ideals. It recognizes that person-to-person connections are the essential fuel that powers the Internet. Just as Old Media behemoths struggle to keep up with the growth of people-powered content, traditional financial institutions can’t scale like crowdfunding platforms can. Imagine what it would cost a traditional bank to hire enough loan officers to match the network intelligence that millions of citizen lenders provide.

As technology continues to virtualize money, brick ‘n mortar banks have become as superfluous as traditional bookstores. Ornate buildings designed to convey trust and dependability just make loans look more costly. Meanwhile, the world’s bank lending infrastructure is increasingly made up of people like Erastus Kimani and his mobile phone. His status as a dependable borrower qualified him to join a growing network of trustees and vouch for other micro-entrepreneur borrowers in his village of Maragua, Kenya.

Networks of Trust

Remember George Bailey from It’s a Wonderful Life, the small-town banker who helped local entrepreneurs achieve self-sufficiency and resilience? Or the stories of Bank of America founder A.P. Giannini, who in the wake of San Francisco’s devastating 1906 earthquake and fire famously made loans to distraught home and business owners on the basis of a handshake?

Crowdfunding multiplies George Bailey and A.P. Giannini. It uses early 21st century technology to return us to early 20th century ideals of loyalty, reciprocity, and community. The result is highly efficient trust networks based on reputation. It replaces credit score-based lending by faceless institutions with a person to person character-based lending model. It creates connections and stories that intermediary institutions are hard-pressed to facilitate. 34 individuals put their faith in Erastus Kimani. Not surprisingly, he paid back both of his loans in full.

Wall Street is evermore focused on creating increasingly exotic, abstract, and toxic instruments of speculation with little to no societal benefit. Our financial institutions are becoming less and less tied to producing tangible goods and services. In contrast, crowdfunding re-humanizes our economy. It makes the act of lending more fulfilling for both lenders and borrowers, brings meaning to commerce, and creates tangible social and economic value at a mass scale.

Philanthropy Exponentialized

While many traditional attempts to address poverty often set up recipients for a vicious cycle of dependency, crowdfunding platforms tie opportunity to innovation, accountability, and self-reliance. They create an ecosystem where debt, applied to entrepreneurial ends rather than mere consumption, can create value for people rather than simply becoming a millstone around their necks.

In the case of Kiva, lenders invest again when their loans are repaid. Over time, $25 has the impact of $250. $100,000 has the impact of $1 million. $1 million has the impact of $10 million. It’s philanthropy exponentialized.

Google and a growing number of companies and results-driven philanthropists have begun creating multi-million-dollar evergreen loan funds that are tapping the power of this leverage. Imagine if the Small Business Association, the Fortune 500, the World Bank, and even Wall Street followed suit and began directly supporting those three billion overlooked micro-entrepreneurs like Erastus Kimani and Teresa Goines through the world’s bank movement. It would profoundly accelerate our quest to end the global opportunity crisis.

Every technology revolution has its early adopters and its laggards. The early adopters fueling the world’s bank and democratizing access to capital understand that the true path to prosperity lies in recognizing the critical role that micro-entrepreneurs and small businesses play in establishing healthy and resilient economies. They understand that crowdfunding starts with individuals but quickly scales. First, it changes a borrower’s life. Then, a family’s. Then, a community’s. Finally, it changes the fate of nations.

This article was originally published here on May 19, 2014

The Entrepreneurial Opportunities in the Coming “Resource Revolution”

Over the next decade and a half, 2.5 billion people in China, India, and other developing countries will join the global middle class. They are going to need skyscrapers to live in and super-stores to shop in. They are going to want smartphones, cars, flank steaks, air conditioning, pet clothing, Disneyland vacations, and probably some throw pillows.

How is a planet already straining under the pressure of today’s 2 billion middle-class consumers going to accommodate 2.5 billion additional ones?

For many observers, this unprecedented economic growth foretells a Malthusian meltdown. In this scenario, skyrocketing demand for scarce natural resources will lead to unchecked carbon emissions, water wars, massive deforestation, $100 Big Macs for the rich and cricket-meat Bug Macs for everyone else.

McKinsey director Matt Rogers and Stanford professor Stefan Heck have a more optimistic take on the future. In their compelling new book, Resource Revolution, they show how a third Industrial Revolution, focused on radically optimizing land usage and natural resources, is starting to materialize.

In their vision, the combination of finite resources and exploding demand for raw materials and finished goods isn’t a recipe for disaster. Instead, they see it as “the biggest business opportunity in a century.” Dealing with resource scarcity will compel companies to adopt new technologies, new manufacturing processes, and new management practices — all of which will drive innovation faster and faster.

As the global middle class expands, there will massive opportunities for entrepreneurs to create more efficient industries and more productive business ecosystems. Technologies and industries will collide in new and unexpected ways, and these entrepreneurial mash-ups, inspired in part by scarcity, will potentially produce greater utility and prosperity for society at large.

Take, for example, the car industry. Its production processes have been refined over a century of increasing consumer adoption and global competition. Its elaborate ecosystem of dealerships, service stations, roads, highways, parking lots, and fast-food joints with drive-thru windows is so robust and pervasive that driving in America feels as natural as breathing.

And yet for all its culture-shaping success, the entrenched car industry is wildly inefficient – and not just in terms of the 14 miles per gallon a Chevy Camaro gets. Even the most fuel-efficient cars aren’t driving machines as much as they’re parking machines. The average car is on the road only 4 percent of the time. And in that hour or so each day it’s in motion, it does a horrible job of leveraging the energy it requires to operate.

According to physicist and environmentalist Amory Lovins, almost all the energy in a car’s gas tank is either lost to heat dissipation, tire wear, idling, and powering accessory systems like air conditioning, or used to move the massive weight of the car itself – less that 1 percent of that energy is actually used to move the vehicle’s operator. On a similar note, roads reach peak throughput only about 5 percent of the time.

In recent years, however, resource scarcity and the new approaches it inspires has brought innovation to the car industry from entities with expertise in electric batteries, consumer electronics, and information technologies rather than combustion engines.

Tesla and Toyota are building cars that use high-torque, low-waste electric motors. Zipcar, Uber, and similar services make car- and ride-sharing as convenient and reliable as car-owning – thus turning more and more cars into driving machines rather than parking machines. Driverless technologies, pioneered by Google and now pursued by virtually every major car manufacturer and various other institutions (such as universities), will be ready for public adoption as early as 2017. The driving efficiencies that such technologies enable will eventually give every 4-lane highway the throughput of a 32-lane highway.

Tomorrow’s cars won’t just use natural resources more efficiently than today’s do. They’ll also make automobility cheaper, accessible to a wider range of users, more convenient, and faster. Thanks to driverless technologies and the car-sharing services they’ll enable, blind people and old people will be able to transport themselves without assistance. Circling for parking will go the way of dial-up modems. And millions of suburban garages, no longer needed to store two or three lightly used late-model sedans, will be leasable through Airbnb and other sharing platforms as office space for millions of new start-ups!

Ultimately, using raw materials, water, and energy more efficiently – and thus boosting resource productivity – means using them more intelligently. And that’s where networks and platforms come into play. Over the last decade, through platforms like LinkedIn, Facebook, and Twitter, we’ve gotten very good at sharing information about people and organizations, and creating real-time and increasingly granular maps – or graphs – of relationships, networks, information flows, etc.

Where we need even more innovation is in the realm of the so-called Internet of Things – i.e., objects and products that are connected to the web and potentially to each other. Because it is through greater and greater degrees of network intelligence that we can achieve the efficiencies that can boost resource productivity. For example, Tesla knows more about how its customers use its products than most car manufacturers, because Tesla cars send information back to the company about when, where, and how they’re being used (if owners consent to this functionality). In turn, such knowledge can help the company determine what improvements it can make to optimize future usage.

At Greylock, my colleague Josh Elman led an investment in a company called SmartThings that is developing a “physical graph” of the world through a platform that makes it easy to connect various household products to the web. Increasingly, we’ll be able to leverage the collective intelligence that a million connected refrigerators or thermostats can generate to seriously reduce energy loads (in addition to making everything more convenient and fun to use). In this environment, the opportunities for entrepreneurs and entrepreneurial thinking are endless.

Which is not to say that boosting resource productivity to meet the demands of the world’s rapidly expanding middle class will be easy. As Matt and Stefan suggest in their book, it will take long-range thinking and the right inputs from governments as well. Nor will every company out there embrace this challenge. But companies that proactively look for ways to deploy resources more intelligently can certainly help mitigate the strains that will come as the world’s middle class more than doubles in size over the next fifteen years.

Indeed, if we really want to stave off peak oil, peak water, and other instances of potential resource depletion, then we need to keep pushing closer and closer toward peak network.

Originally published April 14, 2014

Photo by Greg Rakozy

Short-term Profit Taking vs. Long-term Value Creation: The Future of PayPal

In January, activist investor Carl Icahn acquired around 2 percent of eBay’s stock. A month or so later, eager for a return on his investment, he published an open letter to eBay’s shareholders.

In it, he expresses concerns about the “long-term value” of the eBay subsidiary PayPal, and its ability to “remain competitive over the long term.” His solution: Spin off the fast-growing payments processor as a standalone enterprise.

While Icahn mentions long-term shareholder value no less than seven times in his letter, his perspective on PayPal seemed far more focused on the short term when he spoke with Forbes a couple weeks ago.

“If you just went out and took it public you’d get a huge premium because of growth…” Icahn told writer Steven Bertoni. “PayPal is a jewel, and eBay is covering up its value.”

According to Bertoni, Icahn would like to see eBay sell PayPal to a company with “a more natural fit,” such as Visa. “Another giant in the space would pay a huge premium for PayPal,” Icahn enthused.

But if we assume that Icahn really does care about creating long-term stockholder value, as he insists, then the true issue here isn’t what sort of short-term pop he can engineer for eBay’s stock price, or what size premium PayPal might fetch from another company.

The true issue is what conditions are most conducive to PayPal growing increasingly valuable over, say, a 10-year time frame. I’ve been interested in this question ever since I served on PayPal’s founding board of directors.

So, what conditions will best help PayPal continue to grow its user base, increase revenues, and bolster its profit margins on a consistent and ongoing basis? Those are the long-term trends that are going to create real value for committed eBay shareholders.

The Innovation Culture of Silicon Valley

To me, what’s most interesting about this story is the light it sheds on the clash of values between Icahn’s Wall Street world and the culture of Silicon Valley.

In the popular imagination, Silicon Valley is mythologized as a place where entrepreneurs who are barely old enough to vote conjure a few thousand lines of code into billion-dollar companies in a matter of months.

But instances where this actually happens are rarer than total solar eclipses. The reality of Silicon Valley is that innovation takes time. The fabled Eureka moments may lead to product breakthroughs. But they rarely lead to fully formed products, and they never lead to mature and fully formed businesses.

Innovation comes from long-term thinking and iterative execution.

The prototypical Silicon Valley venture capital approach to investing is structured around the pace that start-ups evolve. VCs think in terms of five-to-ten year development cycles, not quarterly earnings reports, as they break out funding opportunities into Series A rounds, Series B rounds, Series C rounds, etc. Liquidity is typically seven to ten years down the line.

Strong platforms take years to realize their full potential. They often provide opportunities to cash out early along the way — but for those who are patient and more interested in long-term value creation, their rewards are even sweeter. Just ask Facebook’s Mark Zuckerberg. Or Workday founders Aneel Bhusri and Dave Duffield.

While PayPal is no longer a startup, it still has massive growth prospects. But to someone who isn’t investing in the long term, it’s just a cash cow that’s ready to be slaughtered.

That’s why Carl Icahn is churning out letters to shareholders so fast he actually rechristened ex-PayPal COO and Yammer founder David Sacks as “David Yammer” in his first missive. It’s hard to imagine he could have a coherent long-term plan given that his due diligence doesn’t extend to surnames. (It’s since been corrected.)

Icahn is determined to manufacture consent for a spin-off, then a sale, so he can make a quick profit on that PayPal premium.

If you believe that it takes more than a few caustic letters to shareholders and a quick trade to deliver compounding returns to investors over time, Icahn’s argument loses much of its zing.

After all, long-term value usually results from long-term strategies crafted and executed by a strong leadership team. eBay CEO John Donahoe has lifted the company’s annual revenues from $8.54 billion in 2008, when he took over, to $16.05 billion in 2013. David Marcus, PayPal’s president, is an accomplished entrepreneur who is deftly bringing PayPal into new markets.

Both of them have extensive knowledge of the commerce and payments landscape, and both of them agree that keeping PayPal and eBay together is the best way to create long-term value for both companies. They’ve considered spinning off PayPal, and they have determined that the current setup is the most strategic one.

I don’t have any inside information about their vision, but I do have some thoughts about why the PayPal/eBay combination works as is.

The Future of Payments

The payments space is extremely competitive right now. Amazon, Google, Apple, and Square all want to own it. And none of them are playing with each other. Instead, they’re all deploying whatever strategic assets they have to create their own closed commerce-and-payments systems.

In other words, while Carl Icahn is insisting that eBay and PayPal are two “disparate businesses” with “two very different business platforms” that should separate in order to improve their effectiveness, everyone else in the space is converging as furiously as they can.

Amazon is a commerce platform with its own payments system. Google has a commerce platform and a payments system. Apple has the capacity to leverage its commerce platforms (iTunes, App Store) and its hardware into a closed-loop commerce system that would let users pay for online and offline purchases using their iPhones. Square has allied with Starbucks because it needs large commerce partners to feed it transactions to process.

Any one of these payments system players would likely jump at the chance to add to one of the world’s largest decentralized commerce platforms to their strategic assets.

They can’t, however, because PayPal did that 12 years ago, when it sold itself to eBay.

At the time, I was working as PayPal’s Executive Vice President and helped engineer that deal. We had taken PayPal public earlier that year and had plenty of capital, but we felt that joining eBay would be advantageous for long-term innovation. There were massive synergies between eBay’s peer-to-peer marketplace and PayPal’s easy-to-use payments mechanism. Working as a team, we could share data and analytics about customer acquisition and fraud activity, we could grow our user base faster and less expensively, and we could create higher profit margins in a marketplace where a huge number of higher value transactions would be taking place on a consistent basis.

Twelve years later, the synergies that led to our deal with eBay are no less relevant. Today, 30 percent of PayPal’s $180 billion in annual transactions take place on eBay. 30 percent of its new users come from eBay. Its profit margins are higher here than they are in less established parts of its business.

Thanks to its mature and lucrative eBay business, PayPal has the ability to keep its margins as low as possible in the areas where it is undertaking its greatest expansion efforts – namely mobile payments and retail payments. And as evidence from the last couple of years suggest, this relationship is allowing PayPal to innovate in dynamic and abundant fashion. Last year, it launched 58 new global product experiences. Its mobile business has grown from $14 billion in 2012 to $27 billion in 2013. It has signed up approximately two million physical retail locations that accept PayPal as a form of payment.

As competition in the payments sector intensifies, profit margins on all payments systems will likely start trending to zero. As that happens, controlling major commerce platforms will become even more important to payments players, because they’ll still be able to create value by building valuable ecosystems on top of them.

Building Shareholder Value With a Competent Board of Directors

As Carl Icahn correctly asserts, companies do need to be responsive to their shareholders. Sometimes, activist investors can help spur constructive action against CEOs and boards who have been mis-managing a company’s long-term innovation efforts. That isn’t the case with PayPal.

Instead of providing a compelling explanation for why PayPal would be better off diverging from eBay at precisely the moment when everyone else in the payments industry is looking for convergence opportunities, Icahn has invested energy into attacking the integrity of eBay board members Marc Andreessen and Scott Cook, and the leadership abilities of eBay CEO John Donahoe. In a series of letters, he has insisted Marc Andreessen bulldozed the rest of the board of directors and unilaterally orchestrated a transfer of Skype to Microsoft that benefited Andreessen’s own firm to the detriment of eBay. Icahn should know better; these types of decisions are made by the entire board of directors.

While this has made for lively if unconvincing theater — in Icahn’s imagination, Andreessen has almost Lex Luthor-like powers to control the minds of others — it doesn’t qualify as a long-term strategy.

Instead, it’s classic market exploitation. And while market exploitation can lead to a quick buck in a quick trade, it creates less value over time than more fundamental approaches that rely on strong leaders executing carefully considered plans to build lasting assets.

In the end, Icahn’s stock in trade is trading stocks. Silicon Valley’s stock in trade is creating powerful products and platforms. The former approach creates short-term returns. The latter approach creates economically productive ecosystems that spawn industries, jobs, products, and services that benefit society at large, and compounding profits for long-term shareholders.

This article was originally published here on March 5, 2014

What I Wish I Knew Before Pitching LinkedIn to VCs

At Greylock, my partners and I are driven by one guiding mission: always help entrepreneurs. It doesn’t matter whether an entrepreneur is in our portfolio, whether we’re considering an investment, or whether we’re casually meeting for the first time.

Entrepreneurs often ask me for help with their financing decks. Because we value integrity and confidentiality at Greylock, we never share an entrepreneur’s pitch deck with others. What I’ve honorably been able to do, however, is share the deck I used to pitch LinkedIn to Greylock for a Series B investment back in 2004.

This past May was the 10th anniversary of LinkedIn, and while reflecting on my entrepreneurial journey, I realized that no one gets to see the presentation decks for successful companies. This gave me an idea: I could help many more entrepreneurs by making the deck available not just to the Greylock network of entrepreneurs, but to everyone.

And so today I’ve published LinkedIn’s Series B deck on my personal website. There are three thematic emphases:

  • how entrepreneurs should approach the pitching process
  • the evolution of LinkedIn as a company
  • the consumer internet landscape in 2004 vs. today

To help you figure out what aspects of the pitching process you’d like to understand better, I’ve summarized seven prevalent myths below, which I address more deeply in the full presentation.

1.

MYTH: The startup financing process is about one thing — money.

TRUTH: A successful financing process results in a partnership that delivers benefits beyond just money.

A successful financing process obviously results in you raising capital for your company. But there are other critical outcomes you should shoot for as well. For example, great investors can significantly boost the strength of your network, which helps in recruiting employees and acquiring customers. Great investors can also be a source of network intelligence, so you can better prepare for likely challenges and opportunities ahead.

Put another way, the ideal financing partner is a financing cofounder. This is why already-wealthy entrepreneurs raise money from experienced investors for their next startup: they know partnering with angels and venture capitalists is about more than just the money.

Sadly, many investors actually add negative value, so an investor who adds no value (“dumb money”) but who doesn’t interfere with the operational process can sometimes be a decent outcome. But ideally you find an investor who can proactively add value (“smart money”).

How do you know if an investor will add value? Pay attention to whether they are being constructive during the pitch and financing process. Do they understand your market? Are their questions the same questions that keep you up at night? Are you learning from their feedback? Are they passionate about the problem you’re trying to solve?

2.

MYTH: If your team is strong, show the team slide early in your pitch.

TRUTH: Open your pitch with the investment thesis.

You have the most attention from investors in the first 60 seconds of your pitch, so how you begin is incredibly important. Most entrepreneurs start with a slide on the team. The team behind your idea is critical, but don’t open with that. Instead, open with what the investors have to believe in order to want to want to be shareholders in your company — the investment thesis.

Your first slide should articulate the investment thesis in generally 3 to 8 bullet points. Then, spend the rest of the pitch backing up those claims and increasing investors’ confidence in your investment thesis — which includes background on the team. Clearly articulate your investment thesis so investors can offer feedback that helps you refine it, eventually getting to a place where you both agree on it.

This advice applies to seed funding rounds, too. Yes, seed investors understand that early stage companies have many unknowns and the idea will change a lot, so they look carefully at the people to see whether the team will be able to adapt. But even at this stage, lead with your overall investment thesis. Persuade investors your investment thesis is intriguing, then show who can make it happen.

3.

MYTH: All investment pitches have the same structure.

TRUTH: Decide whether your pitch is a data pitch or a concept pitch.

Your investment thesis is either concept-driven or data-driven. Which kind you are pitching?

In a data pitch, you lead with the data because you are emphasizing how good the data already is. Investors therefore evaluate your company based on the data. When LinkedIn went public, it was a data pitch to public market investors. We showed investors a multi-year track record of data.

If it’s a concept pitch, on the other hand, there may be data, but the data supports a yet undeveloped concept. A concept pitch shows your vision for how the future will be and how you will get to that future, so investors will want to buy a piece of it. Thus, concept pitches depend more on promised future data rather than present data.

4.

MYTH: Avoid bringing up anything that might paint your business as risky and decrease investors’ confidence.

TRUTH: Identify and steer into your risk factors.

Experienced investors know there are always risks. If they ask you about your risk factors and you can’t answer, you lose credibility because they assume you are either dishonest or dumb. Dishonest because if you’ve thought about the risk factors, but choose not to share them, you’re implying you’re not committed to a partnership. Dumb because you aren’t smart enough to understand that all projects have risk factors — including yours. Explicitly identify the one to three risks that could thwart your success and how you will mitigate them.

5.

TRUTH: Acknowledge all types of competition and express your competitive advantage.

Entrepreneurs often say they have no competition, assuming that’s an impressive claim. But if you claim that you don’t have competition, you either believe the market is completely inefficient or no one else thinks your space is valuable. Both are folly.

The market is efficient, eventually — if a valuable opportunity emerges, others will discover it. To build credibility with investors, you want to show that you understand the competitive risks and show why you’re going to win.

Express your competitive advantage this way: Why are you going to break out of the pack? What is your advantage? If you aren’t clear and decisive, investors won’t believe you have an edge that can lead to success.

TRUTH: Pitch by analogy.

Every great consumer internet company grows up to be a unique organization. But in the early days, you want to use analogies to successful outcomes to describe what your company is and what its potential could be. Time is short — it helps to refer to what those investors already understand.

The best pitch I heard of was in Hollywood for a film called Man’s Best Friend. The pitch was “Jaws with Paws.” Investors were told that if the movie Jaws was a huge success, a similar plot but on land with a dog could also be a huge success. The movie turned out to be terrible, but the pitch was excellent.

To be sure, pitch by analogy but don’t necessarily reason by analogy. Reasoning by analogy, when you’re developing your business strategy, is dangerous. In startup land, you’re running across a minefield, so the details matter and you have to be careful with your analogies as you conceive strategy. But for high level pitches, analogies work great.

7.

TRUTH: Think also about the round after the one you’re currently raising.

Every time you raise a round, you should be thinking about the subsequent round of financing. Assuming you successfully close the current round, how will you raise money later? Who will be the next investors you pitch? What will their concerns be? What will you need to solve next?

Expect that Series B investors will want to see some slides from your Series A deck. Series C investors will be similarly interested in your Series B deck. Etc. When I created our Series A deck, I presented a growth curve that would be good enough to get an investment, but I also had confidence that I could beat it. I wanted to be able to go into my Series B presentation and say, "Here’s what I said before, and here’s how I did." Because we beat our Series A expectations for network growth, investors could comfortably trust our promise to build revenue with our Series B financing.

Want to dive deeper and better understand how to pitch your startup? Read the full presentation at my personal website.

(Photo: Digital Vision via Getty Images.)

This article was originally published here on October 15, 2013