They had no business model and no revenue in November of 1999. By August the next year, they were burning $12 million per month. 

Reid Hoffman said to Peter Theil:

“If we were standing on the roof of the building throwing off wads of hundred dollar bills as fast as we could, we would not be spending as much money as fast as we are now.”

Methods of Prosperity newsletter is intended to share ideas and build relationships. To become a billionaire, one must first be conditioned to think like a billionaire. To that agenda, this newsletter studies remarkable people in history who demonstrated what to do (and what not to do). Your feedback is welcome. For more information about the author, please visit seanallenfenn.com/faq.

Last week on Methods of Prosperity. Three former employees at PayPal co-founded YouTube in 2005. Until 2004, sharing videos on the internet was unfeasible. Cell phones featured built-in cameras installed in them around 2002. Macromedia Flash Player 7 became available in 2003. Affordable broadband internet connections allowed users to share videos. The only thing missing was if someone could build a website to make it easy. Jawed Karim, Steve Chen, and Chad Hurley proved the concept. They secured funding from Sequoia Capital. Jawed Karim uploaded the first YouTube video on April 23, 2005. Google acquired YouTube in October 2006 for $1.65 billion in shares.

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The following is Methods of Prosperity newsletter number 37. It was originally deployed February 29, 2024. As of November 7, 2024, original subscribers have received up to issue number 73: Sam Zell (continued).

Part 37:

TL;DR

Reid Hoffman is a co-founder of PayPal. After eBay acquired PayPal, Reid Hoffman co-founded LinkedIn with Eric Ly in 2003. Reid Hoffman and Eric Ly envisioned a platform that would do three things. Help individuals find jobs. Connect with professionals in their field. Enhance their career prospects through online networking. LinkedIn focused on professional networking and career development. That set it apart from other social media platforms like Facebook and Myspace. LinkedIn would emphasize users’ professional connections. It did this through profile pages. Resumes, job listings, and networking opportunities connected users. In its early days, user adoption was slow. Microsoft acquired LinkedIn in 2016. Their price was over US$26 billion. It was the largest acquisition in Microsoft's history. 

Key lessons:

• What got you here won’t get you there.

• Pay attention to economies of scale.

• Validate your investment thesis.

• Aim for market share.

• Scale fast.

Learn more here!

In January, PayPal didn’t need a business model. By March they tried to be a bank. Between April and May of 2000, they realized being a bank was not going to work. August was their last chance to figure it out. By September, Reid Hoffman, Peter Theil, and Max Levchin decided. PayPal would be a payment service.

After PayPal, when he founded LinkedIn, Reid Hoffman learned not to focus on revenue. Instead, the goal would be scaling fast. With a payment service, it doesn’t work until it has a billion dollars worth of transactions. Also, they must mitigate fraud risk. Then, your competition gets wind of your product. That’s when you start running out of time to capture market share.

Understand why PayPal, LinkedIn, Facebook, and similar enterprises work. Let’s make sure we define what a network effect is. It refers to a phenomenon. This occurs when the value of a product, service, or platform increases as more users join. It’s also known as network externality or demand-side economies of scale. Network effect describes how the value of a good or service increases as more users adopt it.

Consider Metcalfe’s Law for example. The value of a telecommunications network grows with the square of the number of users. Related to that is the law of large numbers. Take a large number of independent and identical random samples. If the true value exists, the average of the results obtained from it converges.

For LinkedIn, trying to monetize from the very beginning was not realistic. The product would underdeliver if they tried to grab every dollar from the get-go. During their series B round, the concept was that LinkedIn would be a corporate product. Users would subscribe to the work-centric social network. They would pay for it with their company credit card. The team didn’t actually build the product until after realizing demand, but they had to scale fast.

Paper testing is where a company will run ads for a product that isn’t actually made yet. The team decides to roll out a product after customers click-through the ad. This is a way to measure demand. LinkedIn used this tactic by creating a mock-up on paper of what they were building. They then hired a B2B sales person to go out and sell it. The goal in paper testing is to find product-market fit.

Friendster, the original social media platform, had viral growth. LinkedIn did not. Not at first. They launched the first version of LinkedIn in 2003. It was a social network for professionals. Users could host their resumes online. It aimed to provide a platform for professionals to network. They could connect with others in the business world. It allowed users to showcase their professional experience and skills.

Do you know about my livestream podcast? It’s called Hidden Secrets Revealed Live (HSRL), and I record it live on 𝕏 every Wednesday.

LinkedIn focused on helping users build their professional connections and find job opportunities. The platform allowed users to create profiles. Users connected with other professionals, posted their CVs, and searched for jobs. LinkedIn evolved into more of a contact relationship management service for individuals. It began offering features like networking tools and job search capabilities.

In its early days, user adoption was slow. Within the first week of its launch, LinkedIn had 2,500 users. Which increased to 6,000 after the first month and reached 37,000 users within six months. By 2016, LinkedIn’s network was over 400 million registered users. It held the dominant position in the professional networking space. Microsoft acquired LinkedIn in December of 2016 for more than US$26 billion. That’s the largest acquisition in Microsoft’s history. For comparison, Microsoft invested a total of $13 billion in OpenAI.

Reid Hoffman tends to emphasize one important observation in his talks. “What got you here won’t get you there”. For example, an A player at one stage is not an A player at the next stage. You must reconfigure your teams as your organization scales. Large scale companies and organizations are not static, they are dynamic. You as a leader must negotiate those changes.

Another important observation is this. Effective teams and co-founders must guide each other towards accurate truth. The goal is to reason with each other and collaborate well, not to agree on everything. For instance, in the PayPal days, Max Levchin was in charge of fraud prevention systems. He would interrupt Peter Theil, bringing precautions to his attention. What makes great teams is this. Collective learning and problem solving in the short-term and the long-term.

Three questions:

Refer to newsletter 28, Peter Theil’s catchphrase question. He’s famous for asking: “What important truth do very few people agree with you on?”

A related question informs Reid Hoffman’s motivations. In choosing companies to invest in, he asks the following question. “What is your explicit theory of human nature which underlies the mission and what you’re trying to change in the world?”

As an investor, he invests in one or more of the seven deadly sins. 

For instance, greed. That’s LinkedIn. Facebook is vanity.

The third question is this. “Why is it that you think, when you’re thinking about a market that isn’t already existent – that you know that other people don’t know, on a contrarian basis, that leads you to think that market should exist?” The context of this question is a lecture at Stanford for Y Combinator.

What’s your investment thesis? In other words, how do you validate your idea? 

For example, Steve Jobs needed no market validation before shipping the iPhone. Elon Musk had no indication that there would be a demand for electric cars. There was very little demand for electric cars at the time.

For LinkedIn, Reid Hoffman’s investment thesis was this. Classified ads provided means of recruiting for the information age of newspapers. But for the information age of the internet, we need something else. It seems obvious in retrospect. It was easy to validate the proof-of-concept in 2003.

Reid Hoffman and Eric Ly founded LinkedIn. Reid Hoffman launched it on May 5, 2003. Microsoft acquired LinkedIn for $26.2 billion. Reid Hoffman joined Microsoft’s board in 2016. He has no leadership role at LinkedIn. He’s partner at venture capital firm Greylock Partners. Reid Hoffman’s estimated net worth is around $2.5 billion. He’s a member of the PayPal Mafia. He’s an investor in Airbnb. He’s an investor in Aurora, which acquired Uber’s self-driving unit. He invested in Zynga, and OpenAI. He’s an early investor in Facebook.

Speaking of Facebook, stay tuned for next week!

I like you,

– Sean Allen Fenn

PS: You don’t have to follow me on 𝕏, but you can partner with me to bring about serious advancement for each other.