How to make the most of tough pivots? What are the right growth targets?
REID HOFFMAN: Hi, listeners. It’s Reid. Welcome to the Masters of Scale Strategy Session.
In these episodes, selected entrepreneurs, business owners, and CEOs ask the most burning questions on their minds, what challenges them, what intrigues them, where they see risk and opportunity.
With each question I offer my perspective about steps to take or practices to consider in ways that hopefully resonate for all of you.
For this Strategy Session, we’ve tapped into our community, offering Masters of Scale members the opportunity to pose their questions.
In this session, you‘ll hear from five different entrepreneurs from our Masters of Scale Membership community. They’re from all around the world, and come from a wide variety of businesses. If you’d like to submit your question for the next membership Strategy Session go to mastersofscale.com/membership to become a member.
And I’m delighted to be joined by our co-host Bob Safian who will introduce the guests and frame each question for us.
Bob, excited to do another Strategy Session with you!
BOB SAFIAN: Hey Reid. Indeed! These start-up leaders from the Masters of Scale community have such important questions, personal but broadly applicable, and we love sharing your insights on their challenges with everyone.
It’s a diverse group of founders at different stages of scale, with questions that’ll resonate for anyone chasing scale.
Should we jump right in?
SAFIAN: Then let’s do it!
Our first question comes from Antoni Gruca, a self titled “aspiring entrepreneur.” Antoni’s question is about how best to prepare for making the jump off the cliff into starting a company. It’s a challenge that every entrepreneur has struggled with. Let’s listen.
ANTONI GRUCA: Hi Reid. I’m Antoni Gruca, and I’m an aspiring entrepreneur from Poland, currently studying for my master’s at HEC Paris. The Masters of Scale app was my daily commute companion throughout the semester and I was wondering: When it comes to entrepreneurship, some people jump in right after college, or even before, starting their own company right away. But other founders do a little more preparation. If you’re not quite ready to strike out on your own yet, or maybe don’t have the right idea in place, what’s the best role to pursue in business to prepare yourself for entrepreneurship? Should you be looking to focus on product, finance, or sales, or something completely different?
REID HOFFMAN: Anthony, great question and important for every entrepreneur.
To prepare yourself for entrepreneurship, it’s generally best to get as close to entrepreneurship as you can. So join a start-up however you can. When I look back on my own career, I think about what would have happened if I had gone to Netscape versus joined Fujitsu? I joined Fujitsu because I thought, well, okay, being close to the product as an entrepreneur. It was my very first product manager job working on a virtual worlds product called WorldsAway. Not a bad thesis.
But on the other hand, perhaps if I’d done anything at Netscape, even assistant sales or office management, or anything else. One of the challenges of working in other areas of business is that you’re almost always working on what I call V1 to V2 products or V1 to V1.1 products. And the entrepreneurial experience is the V0 to V1 product. And you need to get that experience and realize what a blind leap off a cliff that is and what triage, and how you pivot, and how you first have another idea and you change to another one.
Now, when you begin to think about product development or finance or sales, which of those areas is absolutely most important depends on where you’re going to be an entrepreneur. So for example, a consumer internet product, it’s product development. But sometimes sales are most important like within enterprise.
So it tends to be where is the anchor the industry that you would think you might want to go into? Because the founder having the depth of instinct on that and then pulling everything else around it together is what’s key. So it isn’t one size fits all. It’s where you think you might want to be heading when you become an entrepreneur.
SAFIAN: Thanks Reid. As you say, we can’t quite predict what we’ll need to know when we make the leap into entrepreneurship – sometimes you just have to face the unknown.
But it also makes sense to leverage what we know because that’s where our best ideas often come from too.
Let’s go to our next question, which comes from Krystal Lucado.
It’s a question about strategy, and about mindset, and actually something I’ve been curious to ask you too Reid. How should we think about future planning?
Let’s listen to Krystal.
KRYSTAL LUCADO: Hi Reid, my name is Krystal Lucado. My father was in the U.S. Army where backward planning is instructed by Troop Leading Procedures: to start by envisioning an operation’s end state, and then work backward, step by step, to the beginning. It’s a process that begins by answering the question, “Where do we eventually want to be?” When working on a start-up that aspires for global scale and impact, when do you rely on backward planning, and when do you rely on forward planning, and when do you do both?
HOFFMAN: So Krystal, this is a great question because the short answer is you always have to be doing both forward planning and backward planning. Now most commonly from a seed or Series A start-up you’re intensely on forward planning. And the backward planning is a little less, just more of like a poll star. “This is what we could be when we’re a platform when we’re huge, when we have a billion people in the world,” but you don’t want to spend too much time on that because you need to solve the initial plans first.
One of the metaphors that I frequently use, given that we’re using a military question here, is Marines take the beach, Army takes the country, and the police govern the country. Part of that is to break the process up into three phases. The first phase, Marines taking the beach is,”Oh my gosh, how do we do this? What’s the thing that we find product market fit?” You have to be really scrappy, very pragmatic about it. And you’re pivoting a lot.
The second phase is “ah, we found product market fit. We’re now going to scale. We’re perhaps doing blitz-scaling, and we’re building out into the entire market.”
The third phase, the police, is once you’ve kind of established yourself in the market, you’re now governing the ecosystem. You’re tuning mores towards efficiency. So back to your question, in an early stage startup, it’s a lot of pivoting because by the way, your pivoting in order to get on the beach may require you to choose an entirely different beach and therefore your backward planning, thinking this is the market you were going to establish may now be entirely irrelevant. And so that’s the reason why you emphasize forward planning, but having that poll star and thinking about what’s the way we get to scale, what’s the market that’s sizable that we’re going after is a really key thing to keep in mind as you do that forward planning.
SAFIAN: I love that metaphor about the Marines, the Army, and the police. Clarifies the different phases. And I also love how you describe the need for both: we need that North Star, but we also need to be acting based on the world of today. Otherwise, we’ll never get to that future dream.
On to the next question, which is another great one. It comes from a Masters of Scale Member that some of you listening, and you Reid, may be familiar with. Tudor Mihailescu is the co-founder and CEO of SpeechifAI. Tudor joined us during our live Strategy Session last fall as a contestant in the crazy entrepreneurial game show we called The Pivot Point.
If you haven’t heard the recording of that super-fun session, you should definitely scroll down the feed in your podcast app and find it after this episode is over. It’s the one titled “Strategy Session Live!” from December 14th, 2021.
Tudor’s question today is about yearly goal setting for startup growth: How much is enough? It’s something every early stage founder obsesses about, trying to gauge their progress, their status.
TUDOR MIHAILESCU: Hi Reid, I’m Tudor Mihailescu, co-founder and CEO of SpeechifAI, an AI start-up that helps companies generate organic traffic through social sharing, based in New York City. How would you advise a pre-seed startup to go about setting growth objectives for the year? Do you choose one metric to focus on, or multiple areas? And, is there a threshold rate-of-growth that a tech startup has to hit to be compelling, like the 5-7% weekly growth rate that Paul Graham has cited as a YCombinator benchmark?
HOFFMAN: Just like everything in entrepreneurship, it depends a lot on the market, and it depends a lot on the competition.
Now, if you can do a five to 7% weekly growth rate, that’s great. And generally speaking, growth rates start small, get to a large number and then decrease over time as you get more mature. So the five to 7% weekly growth rate is a great early stage benchmark, and it’s a software growth rate. Usually in the world of atoms versus bits, that’s a little bit harder to get to that kind of growth rate.
Generally speaking, you should have as few metrics as possible. So that everyone can unify around them. You can do the analysis of what it takes to get there. When you’re kind of figuring out other parts of it, you can relate them back to this one metric.
And it’s worth thinking pretty hard about what metric you’re initially targeting. Now you can still pivot to other metrics as you learn them. And sometimes what you realize is you say, well, which thing is most important? Is it registrations, is it engagement, is it a certain kind of engagement, is an engagement with a certain market? Is it a loop that goes from, for example, how you discovered an SEO to how you’re engaged? These metrics can in fact be the core one you may actually be discovering as you go.
And even when that’s maybe only a 2% or a 1% weekly growth rate it still compounds ultimately to something that’s so strong that it’s a great strategic place to be. So again, it’s not a particular magic number as much as it’s something that helps you establish being the leader in your market with strong barriers against the competition.
SAFIAN: Welcome back to this special Strategy Session featuring questions from members of the Masters of Scale Community. And answers from our own Reid Hoffman.
Our next question is from Hoda Mehr. Hoda is the founder and CEO of a super cool start-up called StockCard.io.
Hoda’s question is about intense pivots, and how founders should describe them to investors. She asks the question as an early stage founder, but the topic comes up at critical times for companies at every stage of growth.
HONDA MEHR: Hi Reid, I’m Hoda Mehr, founder, and CEO of StockCard.io, Roblox for individual investors and creators. My question for you is: If you’re a seed-stage startup, and you’ve taken on a pivot to a new approach, what’s the best way to explain that to potential investors? When I’m straightforward about it, I’ve gotten some negative reactions – like it’s a signal of failure or that we’re trying to distract from an earlier direction. Should we consider changing the name, launching a totally new company, or just not bringing up the pre-pivot activities?
HOFFMAN: Hoda, this is a very important question for a lot of entrepreneurs. If you’re genuinely learning, and you’re generally actually assessing product-market fit and scale product-market fit, you will find that things will change a bunch from your initial idea.
The important question here is framing. So it isn’t that you need to mask the pre-pivot activities, it’s that you need to frame what they have led you to. If your conclusion on the pre-pivot activities is it was just foolishness, and there was nothing there, then just kind of like, “Hey, we were experimenting. We’ve moved on. Here is what we are.”
But if instead, it was learning, and you’re demonstrating your ability to pivot, your ability to assess product-market fit, your ability to say we’re nimble, and we’re committed to finding the things that are very interesting, then framing them the right way is the thing to bring up with investors. It’s not saying, “We failed.” It’s: “We engaged. We learned. We pivoted, and we’ve adjusted.”
That then gives you the way of thinking about what does changing the name, or launching a new company, or doing any of those things matter. Because if you say, “Well, in order to show that we’ve learned, we’ve launched a new company, or we’re changing the name to something that’s more appropriate to what we’re doing now.”
The thing that investors are looking for, especially on the very early stage, is your ability to take a plan seriously, engage seriously, learn from feedback, and adjust. It’s one of the reasons why investors frequently talk about how important the entrepreneurs are for their investment thesis.
I’d say easily the majority of seed investments pivot to something that could be fairly different than what they start out, in order to get to scale, or in order to get to product-market fit. I think the most interesting historical example of this is I believe that Sony, that is Sony Electronics Corporation, started out with hot water bottles.
And there’s a more general lesson here for entrepreneurs pitching investors. When you encounter something that you think might be a negative, or might be viewed to be negatively, the question is how to spin that into a positive. For example, when I pitched the Series A of LinkedIn, they’re all looking for revenue, they’re all questionable how to get to profitability, “we are not going to seek revenue at all,” because the smart network building is to build your network first, like we did with PayPal, and then to get into revenue and monetization.
So as opposed to it being a failure of, “Well, you’re not going to get revenue, and maybe you can’t get revenue out of your first venture investment.” It’s: “No, no. It’s a feature.”
And to some degree, framing these things as intelligent strategy, as learnings, is both an important thing for your mindset as an entrepreneur, but also selecting the right kinds of investors that you would want to have as partners.
SAFIAN: There’s so much in that answer, Reid, about the importance of learning, as a critical tool for entrepreneurs, and for all of us. And about being honest with your missteps and your learnings – but also being thoughtful about how to turn them to your advantage.
Our final question comes from Shamina Dhana. Shamina is a serial entrepreneur who’s starting a new company called D/Sphere in the fashion/tech world.
Shamina asks about the challenges that a truly inventive start-up can have in pitching a new, unproven idea to investors. These are the kinds of realities that any businessperson, at any stage company, will be forced to navigate when looking to build momentum around a brand new concept.
SHAMINI DHANA: HI Reid, I’m Shamini Dhana.
I’m an entrepreneur based in California, and my latest project is a creative fashion tech platform called D/Sphere that is unlocking creativity through personalization of fashion by leveraging second-life materials. There’s a lot of talk about climate change and the need for innovative solutions, but I’m finding that investors are skeptical about backing a marketplace that doesn’t exist or is still underdeveloped. Our platform D/Sphere could unlock significant network effects by empowering the collective, but it’s still early. How would you best advise that entrepreneurs demonstrate the power of their idea?
HOFFMAN: Marketplaces are hard but very valuable. Marketplaces, whether it ranges from Airbnb or eBay, or even more broadly put like LinkedIn for talent and others, are super valuable when they get to scale, and they become an enduring part of economic, business, and sociologic infrastructure. But part of the reason why they’re difficult is because the same kind of network effects that lock them in and enable them when they’re at scale also are very difficult to get into place. It’s almost like an anti-network effect before you get there, because like a buyer shows up and a seller’s not there, so the buyer goes away. And then a seller shows up, and the buyer’s not there, so the buyer goes away.
Frequently, it’s an occasional transactional environment that doesn’t have the ongoing engagement that a social media or other property might have. Part of the reason why eBay buys advertising fairly constantly is because obviously the people buy and sell off eBay a lot remember it doesn’t need the advertising. But the people are like, “Look, I was aware that eBay was there, but I was looking for something, and it didn’t occur to me to look on eBay as a way of doing it.”
And so, these are the kinds of things that make marketplaces very difficult to get going, and you have to get to the critical mass such that it works. And what’s more, marketplaces frequently are thought about as two-sided, but frequently there’s also multi-sided marketplaces where there’s multiple participants, which makes it even more challenging.
Generally speaking, most people say, “Well, the marketplace doesn’t exist because the demand isn’t there.” So the real key thing is how do you get the demand going?
You need to give the best possible evidence that the demand might possibly be there. Now, some of it might be: “We have a real privileged channel for aggregating supply. And once we really aggregate the supply in a unique way, we think we can get to the demand.” It’s a theory, but you can show evidence to the theory. Another is you can try to pull, get Intel of search characteristics or purchases in various domains, to show that there is actually in fact, some natural demand and you just need to aggregate it.
A classic entrepreneurial approach is to go buy some advertising on a platform like Facebook, hopefully, at a reasonably low cost basis, and prove click through. And that has a flow through page that includes the potential purchase. You say, “If you put in your email address, we’ll email you when it’s live. Thank you very much.” Et cetera.
And if you do that at some scale where you have some evidence to show that there may be buy-side demand here, then that could be another way to potentially show the power of the idea. But you will have a bunch of people being hesitant and uncertain because for every successful marketplace, there have been thousands of failed marketplaces. Don’t just rely upon one way of trying to demonstrate the availability of the demand, the potential strength of the power of your platform, but to line up a couple of different ones.
Getting some buy-in or support from experts. Getting some people invested in who know about marketplaces and who have some ability to help. But, marketplaces are a very difficult game, but a huge game. And I myself personally love when new marketplaces are constructed, which is one of the reasons of course, when Airbnb pitched me three minutes into the pitch, I told them, “Yes, I’m going to make an offer to invest.”
Generally, every seed or Series A pitch is good to have what I think of as the Hollywood pitch. The best Hollywood pitch I think was not a great film but an awesome pitch was a film called A Man’s Best Friend, and it was pitched as “Jaws with Paws.”
Now the more often Hollywood pitch is, it’s Airbnb but for second life materials, right? And that kind of pitch is almost always extremely valuable to have. So it’s like, “Okay. It helps me visualize that. Helps me frame a set of questions, helps me understand it.” Obviously, the closer you are in various ways, the more it could work.
Now, if you’re getting the competition, if you have a competitive marketplace, that may very well drown you out, right? If it’s a competition that you have a really decisive angle on, that’s interesting. Frequently entrepreneurs say, “We have no competition.” That’s hard to believe.
So you always say, “Here are some of the things that are competitive. Here is why we’re very different. Here is why our thesis could play out very differently.” Do mention competition. But, what you’re trying to do is frame why it is you have a really interesting shot and a super interesting business.
SAFIAN: Well said Reid, as always.
We hope you all listening enjoyed this Masters of Scale Strategy Session. As Reid said at the top, if you want to submit a question for the next Strategy Session, become a member by going to mastersofscale.com/membership.
You’ll also get access to the Masters of Scale Courses app that Antoni mentioned early on, and you’ll be able to join the private Masters of Scale Linkedin group where you can connect with every Masters of Scale Member, including everyone we heard from today!
And with that, I’m Bob Safian.
HOFFMAN: And I’m Reid Hoffman, thank you for listening.