What I Look for When Investing in Tech Startups

Steve Hoffman

United States
Long-Term Investor

Who are you and what’s your story?

My name is Steve Hoffman, but in Silicon Valley, they call me Captain Hoff, because I’m the Captain and Chairman of Founders Space, one of the world’s leading startup accelerators.

I’m also the author of three books: Make Elephants Fly, Surviving a Startup, and The Five Forces that Change Everything. Make Elephants Fly is about the process of radical innovation, Surviving a Startup focuses on everything entrepreneurs need to know to survive, and The Five Forces dives deep into where the five core technologies will take us in the future and how they will transform our lives.

I got started by founding three venture-backed startups in Silicon Valley. That taught me the ropes. Then I decided to open Founders Space to help other entrepreneurs succeed with their ideas. Founders Space now has over 50 partners in 22 countries. I no longer have a home base. I spend most of my time traveling the globe, meeting with scientists, entrepreneurs, and innovators, and investing in their companies. My mission in life is to help those entrepreneurs who truly want to make the greatest positive impact possible on our lives.

What do you invest in?

I focus on technology startups. I now have a stake in hundreds of companies, too many to mention here. My first investment was in my own startups, which gave me the foundation to understand what truly works and what doesn’t. One of the most important lessons I learned is that your ideas don’t matter. Never stick with an idea that’s not working. Most startups that I see fail to do so because they stick with their original idea too long.

The best entrepreneurs I know are always changing their plans and keep a very open mind, especially in the early days, when the startup hasn’t found a product-market fit. I can’t stress enough that it’s not how hard you work or how persistent you are that determines your success or failure. It’s seeking out and finding hidden pockets of demand that no one else has tapped. Demand is the fuel that drives any business, and an entrepreneur’s job is to first find the untapped demand, and then build the product or service to meet this demand.

I learned this lesson the hard way. In my first startup, we stuck with our original idea too long. We launched an interactive TV company, signed up most of the major networks as our customers, including MTV, NBC, History Channel, A&E, Time Warner, and Turner Broadcasting. But the demand was soft. They were willing to pay during the hype of the dot com bubble, but as soon as that bubble burst, the demand vanished entirely.

If I’d known what I know now, I would have seen this coming and better prepared for the dramatic downturn. But like most founders, I wanted to believe in what I was doing, so I put the blinders on and charged forward. Don’t do this!

Walk us through your process of identifying and executing on investment opportunities?

I’m always looking for entrepreneurs who know everything about their business. These are curious people who never cease questioning everything. That’s the type of person I want to invest in. The disruptors never take anything at face value. They always go deeper. If there’s something everyone in the industry considers true, they will intuitively challenge this orthodoxy.’

I’m also looking for startups that have some sort of proof they can show me that their visionary ideas are rooted in reality. I want to see that they’ve actually spoken with their customers and understand their needs. I like data that illustrates the pent up demand for their product even before it officially launches. I want them to explain to me how their particular product or service will upend their business and make a radical change in how people do things.

Lastly, I look for companies that can scale. I want to see startups that can grow rapidly by replicating their core offering. If the startup can’t become a billion-dollar company, there’s no point in my investing because I know that it will be hard to find other investors down the road as they grow and even harder to exit.

Since you first started, what have you learned that has had the biggest impact on your success and the growth of your portfolio?

The best day of my life was when I finally found the dream CTO for my fledgling startup. I thought this engineer was a gift from God and entrusted him with our entire system. At first, things were humming along nicely, but after the first month, warning signs began to show.

At first, things moved slowly, and when I questioned what was happening, I received evasive answers. The more I pushed, the more push-back I got. Then when it came time to launch, the entire system crashed. This was the worst day of my life. There’s nothing more painful than launching your startup and having it crater.

I should have fired the lead engineer on the spot, but I was afraid that he was the only one who knew the code well enough to fix the problem. I kept giving him a second, third, and fourth chance.

But as the months rolled past, nothing got better. What I learned is that if someone isn’t working out, fire them early. You will never regret it. And don’t think you can’t live without anyone.

Sure enough, when I finally got up the nerve to fire him, everything suddenly turned for the better. His replacement turned out to be my knight in shining armor. He entirely rebuilt our platform in a matter of weeks and had it running flawlessly. I can’t stress enough. Fire fast. As soon as your gut tells you it’s not working out, that’s when you take action. Don’t second guess yourself.

The same is true when investing. Cut your losses and move on. Don’t wait and hope!

What books, platforms or resources have you found useful?

I read at least one book per week. I’m a fanatic when it comes to gobbling up new information. I don’t restrict myself to business books. I read books on sociology, psychology, politics, history, fiction, and even a bit of poetry. I recommend every entrepreneur do the same.

You never know where the next great idea will come from, and it’s critical to get inside the minds of the smartest people who ever lived and learn from them.

Some of my favorite books, not including my own, are:

Never Split the Difference by Chris Voss

 

Shoe Dog by Phil Knight

 

The Brain: The Story of You by David Eagleman

What investment opportunities are you excited about at the moment?

I’m really excited about brain-computer interfaces. If you want to see how excited I am, just go watch my TED talk on YouTube. I think these will replace iOS and Android as our future operating systems. Someone’s going to invest in the BrainOS, allowing us to connect our minds directly to the Internet and that will not only transform our lives but ourselves.

I’m also thrilled by the potential of CRISPR. Genes are literally the source code for all human life, and we now have the tools to start reprogramming every living plant and animal on the planet.

There’s going to be countless unicorns in the CRISPR space over the coming decades.

Can you share a story about an investment opportunity that you passed on and went on to grow beyond your expectations?

I’ll tell you a better story. I just launched a startup with my two friends from Infospace. It was called Zannel, and it was an online mobile entertainment network. Before YouTube got acquired by Google, it approached my partner and asked if we could combine with them. We debated the pros and cons. In the end, we decided to go it on our own, and my partner turned down the offer — only to see YouTube rise to stratospheric heights over the next few months and exit to Google.

What a missed opportunity! I wish I could have pressed the “do-over” button.

Where can readers go to learn more about you?

You can visit the site and submit your business plan or contact me at Founders Space.

Founders Space

My Books

Facebook Group

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LinkedIn

Twitter

Thanks to
Steve Hoffman

 for doing this interview.

If you have any questions or comments, leave a reply below.

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One Response

  1. Interesting read. Our business has gone through many changes since it began as an online storage business. I have experienced many of the things mentioned in the article and many are probably still to come.

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