Billionaire investor Reid Hoffman says the best sign of a good deal is an argument with his partners
Airbnb, with its $31 billion valuation and growing global empire, is one of the most exciting companies in Silicon Valley right now.
But when it launched in 2008, even some of the most visionary investors were wary: Letting regular people rent out their homes to strangers would inevitably end in disaster, right?
There were some inevitable hiccups, but they didn't stop the company from becoming a leader in the emerging sharing economy. LinkedIn cofounder and Greylock Partners investor Reid Hoffman was one of the first investors in Airbnb and now sits on its board.
Sure, there was luck involved, but Hoffman knew he was onto something when an argument broke out after the Airbnb founders left the conference room after giving their pitch in 2010, he said in an episode of his podcast "Masters of Scale."
When Hoffman told his fellow Greylock investors why Airbnb would make a great investment, David Sze told him, "Well, every venture capitalist has to have a deal that doesn't work that they learn from. Airbnb can be yours."
Sze was one of LinkedIn's backers, and Hoffman has long admired his opinion.
"He's as smart as smart money gets - and believe me, I weigh his objections carefully," Hoffman said. "If someone as smart as David disagrees with me, I worry. But I also get excited. It's an emotional roller coaster. And as this sort of emotional turmoil plays out in the background discussion, it's hard to give an entrepreneur a hard 'no. The best ideas make you want to say 'yes' and 'no' in the same breath."
This is because universal approval means that the startup's idea is so obvious that it will soon face "a stampede of competitors" that will put a damper on its potential to scale. On the other hand, Hoffman noted, as an investor at a venture capital firm you don't want to have everyone say, "Reid, you're out of your f---ing mind."
Sze's dismissive "go for it" hit the sweet spot, and Greylock led a Series A round of $7.2 million.
Greylock is unique among many Silicon Valley VC firms in that investors don't need unanimous approval to make a deal, and as Hoffman and Sze told Pando Daily editor in chief Sarah Lacy in 2015, "it's found that many of its best investments were deals where the partners didn't agree," for the reasons explained above. When, for example, Sze had Greylock lead a $27.5 million Series B round for Facebook in 2006, one of his fellow partners told him the deal could sink the whole firm.
"What you want is some people going, 'You guys are out of your minds,' and some people going, 'I see it,'" Hoffman said in his podcast. "You want a polarized reaction."
You can listen to the full episode of the podcast, featuring Bevel founder Tristan Walker, on Stitcher or wherever you get podcasts. You can also find a sampling of the "Masters of Scale" series on the latest episode of Tim Ferriss' podcast.