Course "Blitzscaling" Lecture 3.3. Michael Dearing. Questions and Answers with Reid Hoffman

This is a continuation of the synopsis of the 3 lectures of the Blitzscaling course at Stanford University, which Reid Hoffman, John Lilly, Chris Yeh, Allen Blue, and others give.

The lecture was read by Michael Daring from Harrison Metal, who was also one of the first members of the eBay team, and in the second part of the lecture he was asked questions by Reid Hoffman, an American entrepreneur, venture capitalist and writer, co-founder of LinkedIn.

Lecture 1: Introduction
Lecture 2.1: Stages of growth of a startup, "family stage"
Lecture 2.2: Stages of growth startup, "family stage"
Lecture 3.1. Michael Dearing. A bit of the history of entrepreneurship and management
Lecture 3.2. Michael Dearing. Questions and Answers with Reid Hoffman
Lecture 3.3. Michael Dearing. Questions and Answers with Reid Hoffman
Lecture 4.1. Ann Mura-Ko: The Thunder Lizard Theory. Author value
Lecture 4.2. Ann Mura-Ko: The Thunder Lizard Theory. Product, corporate and categorical value.
Lecture 4.3. Ann Mura-Ko: Questions and Answers with John Lilly


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Raid Hoffman: How should the co-founders be chosen?

Michael Dearing: As a founder, you must reconsider your way of thinking. We published a video clip titled “Cognitive Distortion of Founders” (Cognitive Distortion of the Founders) - about how strangely the founders see the world.

For example, if you see the world only in black and white - very critical and quickly make decisions - you need a colleague who thinks more in shades of gray. The key is to find a co-founder that will complement you and mitigate your most dangerous risks.

Raid Hoffman: Which cognitive traits in founders are important for you, as for an investor?

Michael Dearing: Several qualities come to mind:

• Personal exclusivity - the belief that you are not destined to live a normal life - is usually very helpful in establishing a company.
• The perception of the world in black and white, about which we have just spoken. Of course, in this case, the probability of making a mistake is higher, but the speed of decision making is also higher. Sometimes speed is all you have when creating a startup.
• Schumpeter’s mindset no matter how many problems you face, creative destruction is worth it.

Raid Hoffman: Another point I noticed is that the founders should be more versatile. There is a whole list of difficulties at the very beginning, which can only be solved by hiring more specialists as the company expands.

How to hire people? Especially with regard to the first 3-5 people, what would you advise, what should be done and what should not?

Michael Diaring: The main mistake we noticed is that the founders come to us with a shopping list: we need 1 kg of front-end developer, 0.5 kg of iOS developer, etc. This is not done like this.

The first few people you hire should share your passion, and then they will learn everything they need and do everything they need.

We have often seen such people in the immediate vicinity of the founders. Passion must come from natural sources. Using recruiting agents or advertisements is useful, but later, and not from the very first employees.

Raid Hoffman: At what key points should a startup focus at an early stage?

Michael Dearing: When I visit companies, I go around them with a McCallum list - Who works on this? Does he have the authority to do this? Do you know how it all happened all this time?

You will be surprised, but even in organizations of 10 people, literally sitting in one room, deadlines are violated and deadlines are postponed.

Raid Hoffman: What do you think about the need to have a market entry strategy and a distribution strategy?

Michael Dearing: I don’t think that the founder must have a full detailed plan for entering the market, but he should at least have an idea about it.

Have the founders ever thought about entering the market? It helps me understand how their brains work. If the plan does not exist, it means that they are lazy.

Raid Hoffman: What startups can ignore?

Michael Diaring: In my experience, the main aspect of activity that startups can ignore is PR.

There is an opinion that the founders are a brand, and they must be professionals - this is a complete lie, invented by those who sell advertising for page views. You can engage in PR at will, but this does not affect the result.

For example, if you do PR for the sake of hiring, the people you attract will not be the people you need. About startups rarely written in the press, all startups are faced with low rates. You need to find people who want to stay with you even in the most difficult times.

Raid Hoffman: What recommendations for funding do you give to teams that are at the formative stage?

Michael Dearing: Today, the common opinion is that you should not evaluate anything on loans - both on convertible loans and on SAFE loans. Nobody comes to this country for the sake of loans - investors need property.

I suggest you turn to real shareholders - people who are not protected from losses. This is a terrible mistake - to teach the founders not to mess with shareholders. You will not get the same level of commitment if you sell convertible debentures or distributed financing - no one has a manager interested in profits.

It is important to have a direct conversation about the valuation of the enterprise. This is simple math:

How large a loan you need / percentage of participation = company value.
Question from the audience - What about convertible loans with a limit?

Michael Dearing: It's the same. This limit will never be the price of the company - investors should know the price of the company today.

Raid Hoffman: An option that I like in this case is to find a partner in the investment process. The way your complex negotiations go through helps you understand how good your partner is and whether you can solve problems together.

Question from the audience - What about fundraising in a competitive market? - What if they promised me a partnership, but they still want to make a convertible loan with a limit?

Michael Dearing: If an investor says that he wants to make a loan with a limit and help you, then this is obvious and unbelievable.

60% of the meetings that I hold are with the founders, in which I don’t even invest. Most of these founders show me dirty capitalization tables with a lot of investors who have promised to help them - but in fact, they never help.

This never happens because the investor has the property, and he can lose real money if your company fails. I saw many founders who had 30-40 investors who invested 20 thousand each, but they could not get help from any of them.

Question from the audience - Which investors most often answer your calls?

Raid Hoffman: For LinkedIn, we invested Series A with Mark Quamm from Sequoia Capital and Series B with David She from Greylock Partners. We chose several angels in round A, but none of them made it to our round, despite the fact that they were all active.

There are active participants in all leading funds, because this is exactly what allows you to create great companies. One of our investing angels was Josh Kopelman, who invested and helped us even before he founded the capital of the first round.

I think you should discuss in detail with your investors what your alliance will look like in the future, and also you should remind them if they do not keep their word.

Question from the audience - If a highly distributed transaction is not in your interest, how then should an ideal investment round look like?

Raid Hoffman: First, you need a lead investor who will get into trouble with you. Your startup will have difficult moments, and there will be a lot of situations when you need help, and in these situations you will need a real partner. Your partner is your leader, and he will help you with the next round of funding.

I would also include several key investor angels who can provide clients / talents / advice in your industry. For example, if you are working on a startup associated with a large amount of data, I would have attracted someone who is an expert in data.

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