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Friends, 

There is something special about a letter. It is at once remote and intimate. Its blank pages are a place to share the routine details of everyday life as well as big, lofty ideas. Read a collection of great letters, and you’ll quickly discover an unusual blend: a recounting of the weather, a favorite new recipe, a diatribe, a description of a cup of tea. Letters are a format in which space exists – space to diverge and come back, to scurry in one direction and trail off, to express both certainty and doubts. Especially compared to our contemporary modes of communication, the letter (or approximation of it via long-form emails) allows for real contemplation and connection. 

Naturally, then, I couldn’t be more excited to share the very first edition of “Letters to a Young Investor.” Since the very beginning of my venture capital career, I’ve always wanted a way to learn from all-time great practitioners in a manner that captured the sector’s depth and nuance. It is not enough to simply hear that an investor made a fund-returning bet. You want to understand how they did it, what they were thinking about, the apprehensions that plagued them, or clarity that convinced them. You want to grasp the stories, the half-articulated stratagems, and the on-the-fly frameworks. 

“Letters to a Young Investor” is our way of exploring these ideas – and doing so from a fitting altitude. Each Season, I’ll take part in an email correspondence with a venture capital legend, asking them about their biggest hits, greatest mistakes, and tactical lessons. Then, I’ll share the full conversations with you!

Reid Hoffman is the perfect partner to kick off Season 1. Reid brings a unique perspective to the table: he built a +$26 billion business, backed some of the breakout companies of the past generation from their earliest days, and is at the vanguard of the AI revolution. He’s also a fascinating and generous raconteur, making our conversations especially vivid. 

In today’s correspondence, you’ll hear stories and investing wisdom from Reid. Keep reading to hear about his contrarian bet in Airbnb, the importance of having a “theory of the game,” and saying no to the Collisons.

Subject: Where to start?
From: Mario Gabriele
To: Reid Hoffman
Date: Friday, September 29 2023 at 12:30 PM ET

Reid, 

It’s with gratitude and great excitement that I kick off this correspondence. I can’t tell you how much I’ve been looking forward to it. It’s not often we get to have so considered a conversation with someone we admire on so many different dimensions – and who is at the vanguard of the most important civilization-scale change we’ve seen in some time. (Is that overcooking it? A sub-question I’m sure we’ll get to…) 

In studying your work, it’s clear you enjoy digging into big, existential topics. While much of our discussion may focus on the craft of investing – and how to become better at it – I hope we may also dig into several of these big questions.

Before we get into the serious stuff: How’s everything going on your end? Where in the world are you at the moment? I’m writing this to you from Brooklyn amidst a string of very gray, very wet days. I’m about to head to London next week, which I expect will bring more of the same. Very bad walking weather but excellent writing and reading weather. On that front, I’ve enjoyed digging into some of the darker Cormac McCarthy pieces over the past few months. Both Blood Meridian and Child of God were as bleak and brilliant as I’d hoped. I’d be curious to hear what books might be capturing your attention these days. 

While I think we could probably have a very interesting conversation about books for the next few months, I should probably direct our conversation towards the craft of investing. Where to start? When I think about investing, and trying to make the most of my first venture fund, I often think about this quote from Otto von Bismarck: “Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.” 

(A tidbit I found interesting: As you might know, von Bismarck and Rilke were technically contemporaries. One of Rilke’s diary entries mentions arriving in Berlin on the day of the Chancellor’s death. From the diary: “The mood is: Bismarck is dead – long live – Berlin.”) 

The entire industry of venture capital seems to be in conversation with Bismarck’s quote. On the one hand, it’s an asset class prone to herd-following and groupthink – a sector that often seems to be re-learning others’ mistakes. On the other, it’s a search for outliers, a continuous bet against accepted wisdom. How do you balance those competing dynamics? How do you maintain a sufficiently open posture (allowing that this time may actually be different) but sidestep errors? And if you had to lean too hard in one direction or another (perfect calibration feels like a fantasy), which is the better way to skew?

Maybe it’s possible to answer those questions head-on, but it strikes me that peering into your past might offer another avenue. As far as I can tell, your first angel investment was into Nanosolar, a solar panel company, after PayPal went public. (Is that right?) When you think back to the version of yourself you were at the time of your earliest investments, what stands out? What might you have said your investing “filter” was at the time? How has it changed, and what precipitated those adjustments? When did you begin to believe you might actually be good at this thing we call investing? And, ultimately, if you had the chance to return to that ~35-year-old about to embark on his venture investing journey, what would you tell him?

As much as possible, I’d like to try and avoid being Bismarck’s fool.

Gratefully,
Mario

P.S. I enjoyed watching your commencement speech at the University of Bologna earlier this month. (An underestimated European city, in my view – and home to a worrying amount of delicious food.) Any observations or takeaways from your visit to the Learned City?

Re: Where to start?
From: Reid Hoffman
To: Mario Gabriele
Date: Wednesday, October 11 2023 at 6:57 PM PT

Hi Mario,

It seems like not long ago we spoke for the Modern Meditation post, but I now see it’s already been six months…busy year!

Thanks for that glimpse into Brooklyn. I write to you from my home in Washington state. At the risk of undermining our reputation in these parts, it sounds like you’re currently dealing with much more gray, wet days than we are!

I’ve got two recent books to recommend, both related to AI. First up is my Inflection co-founder Mustafa Suleyman’s book, The Coming Wave. It’s a deeply thoughtful view into a near-future transformed by exponential AI. Without eliding the numerous inherent tensions, or resorting to simplistic answers, Mustafa offers a thoughtful, sometimes overly sobering meditation on one of the most complex issues of our time. Next, is Fei-Fei Li’s forthcoming memoir The Worlds I See. It’s a one-of-a-kind book that provides an insider account of AI’s revolutionary developments alongside her remarkable immigrant journey of coming to the United States from China. It was a privilege to read an early copy of this beautiful book.

I’m always appreciative of a conversation featuring an interesting quote, in this case a Bismarck reference. :)  Though board games might seem a tangent from Otto’s words of wisdom, hang with me while I get there.

Since childhood, I’ve been a huge fan of strategy games. Settlers of Catan and their ilk feature a rich complexity that is amplified by the nature of the other players’ styles. With so many adaptive variables, it’s essential to have a flexible and adaptive strategy.

Investing also involves considering a litany of variables. The tricky thing is how highly granular the pattern matching can get. Without a firm grasp of a situation’s full context, it’s almost too easy to apply the wrong lesson. Likewise, while learning from the “mistakes of others” is certainly ideal, it is much harder than it seems to use successfully. 

So while learning from the past is always complicated, I think it’s especially so in terms of entrepreneurship and investing. Because intrinsic to venture investing is that success comes from disproving the past. To operate in this environment, I believe it’s essential to have a good theory of the game.

The most natural theory of a game is the way it has operated in the past. But it’s also now fairly well understood today that investing successes come from when the “rules” based on historical information are disrupted. 

In 2012, despite the prodigious impressiveness of the brothers Collison, I passed on investing in Stripe. Why? First, I basically had PTSD from my PayPal experience. I was wary of any financial services investments because on top of the regulatory complexity/friction, payments are incredibly difficult to get to scale. With insufficient volume, you are left tending to a money-hemorrhaging business due to all the chargebacks and fraud that are intrinsic to payments. So unless you have a really good theory about how to get to scale, it’s a fatal problem.

The Stripe theory of scale was to start with the initial volume from Y-Combinator and grow and broaden from that base. In retrospect, the thing that I missed was grokking the fundamental inflection point that the tech ecosystem was just reaching, and that these businesses would start on and scale with Stripe. While that alone wouldn’t get Stripe to scale, in combination with their other strategies and compounded gains, it would.

One of the ways I update my theory of the investing game is to go back and revisit the important ones: “Why did I make an error in this particular investing opportunity?” Sometimes knowing too much can lead to bad investment decisions, and certainly in the case of Stripe, mine proved to be the wrong lesson!

One of the things I learned from my father is that not making choices can often lead, paradoxically, to closing off future options. Committing and being in the game can produce multiple knock-on effects that change the entire equation. Yeah: More ambiguity! But by being in the game, committing myself to learning and updating my model, based on missed opportunities as well as the successes, I believe I become a better operator and investor.

I did miss Stripe, but another interesting example where thankfully I got it right was Airbnb. It was actually my first venture investment as a partner at Greylock. When I brought it to the partnership, David Sze, looked across the table and said, “Every venture capitalist has to have a deal that they can fail on. Airbnb can be yours.” Mind you, David was the central reason I had joined Greylock, and my most helpful board member at LinkedIn. Again: this was my first investment as a partner! I was taken aback, but I still had my conviction that I was right. I had conviction in my theory of the game; conviction in the Airbnb founders’ comprehensive handle on the theory of the game they were managing.

It would take years before Airbnb’s metrics truly broke away to become the runaway transformative success that it’s become. To David’s immense credit, it was well before that (just six months after the initial investment) that he came to me and said “You were totally right. I was wrong. Let’s talk about this.”

I told David that all of the risk factors he had pointed out: political opposition in cities, the chance that guests would cause problems, unions would fight it, etc– those were all accurate. But I believed that if it did actually work, Airbnb would have a global impact and generate virtually uncapped returns. Those opportunities are special. And despite all the very serious and reasonable concerns, the Airbnb founders had a credible theory of the game for each one. It wasn’t a kind of one-shot faith in a silver bullet, but it was like “Oh, we could try X, we could try Y, or we could try Z. Our X is a good plan, but if it doesn’t work then we’ll…” None of that meant you wouldn’t die on that hill, but it was a good theory of the game, and considering the impact and profit opportunity, worth making the bet.

I had the willingness to be wrong, because that was necessary in order to be a part of that world where our theory of the game could play out successfully. You can’t have a 100% batting average when you are betting on contrarian ideas. Nobody has that. These are dumbass stories we tell ourselves about manifest destiny, our special unique brilliance, and so forth. But what you do is try to make it so that you have an increased chance that the sequence of things break your way. You do your part to try and get luck on your side ahead of time. As an investor, it’s part of a portfolio. I was adamant that we should put money in Airbnb from our fund. If you had told me though, to stake Greylock’s entire fund (or my entire net worth) on the solo investment of Airbnb, I wouldn’t have done it of course...