Transcript of Interview with Jeff Hoffman
Dan: Welcome to another episode of Shoulders of Titans, this is Dan Lok and today I am so excited I have the privilege of bringing you an amazing entrepreneur who is taking ideas who went from zero to multi-billion dollar companies. He has been the founder of multiple startups. He has been a CEO of both public and private companies, a proven CEO, worldwide motivational speaker, Hollywood film producer, an individual who had an incredible impact in my business career and the way I conduct business today. Jeff, welcome to the show.
Jeff: Thank you very much Dan, I’m very happy to be here.
Dan: Now Jeff maybe tell us a little bit about your background and how you got into the business in the first place.
Jeff: Sure, my first experience was business, it wasn’t even intentional. I went away to university that I could not afford and basically they told me you can’t go here because you didn’t come up enough money. So my first business/ entrepreneurship experience and I wasn’t thinking about either of those things were simply the act of solving a problem. I want to go to this university, I didn’t have enough money so I got to find out some way to achieve the goal. It wasn’t the money, it was the goal. I want this diploma. Turns out it took money to achieve that goal but my focus was just getting the diploma. So I started my first company, a little software as a freshman in college just to achieve the goal of getting that diploma. I worked hard for four years but that’s where I got my first taste of business.
Entrepreneurs: Born or Made
Dan: Jeff, do you believe, entrepreneurs are born or do you think entrepreneurs are made?
Jeff: I love that question because everybody always ask it. I’m going to tell you, I think the answer is both but let me explain. The made part is you know today spend a lot of time mentoring entrepreneur. I just got off of a mentoring session right before your show with an entrepreneurs. I did one this morning. There is a lot of things—this is the ‘made’ part—I wish someone had taught me. There is a lot of lessons I have learned and skills that I need and that’s why we have mentors bascule someone could say, “hey I wouldn’t do it that way, I would do this.” So some of the skills you need and experiences could test to be that. The bottom line is one of the single most important requirements being an entrepreneur and a successful one is something that you have to be born with. That’s your risk profile. That’s a DNA thing.
There is a poster that says being an entrepreneur is like jumping off a cliff and trying to build an airplane on the way down. I don’t know if you have ever seen that one. I know people that would never jump off the cliff and they would have counted all the airplane parts twice, they would have had backup tools, they would have asked people to help them build the plane and they would have studied they would have never actually jumped off the cliff at all. So if you don’t have the DNA, for me, that’s you know I’m not a life if all the answers are known. What makes me feel alive is throwing myself off a cliff into the unknown and saying, wow I have no idea what’s going to happen next and I got to think fast. That’s exhilarating for me. F it’s entirely just frightening for you, you won’t be a good entrepreneurs. So the part of being ‘born’ of an entrepreneur is the DNA of risk taking. Try something that you don’t know how it’s going to turn out, if you’re afraid of that, you’re not a good entrepreneur.
Dan: Is there a point in your life like a turning point where I guess I know you worked for a company before that you know what, I’m just going to go out there and start my own thing or was it like almost a force decision because some entrepreneurs maybe they got laid off and they are like you know what, I don’t want a boss anymore, I’m going to do my own thing. What was it like for you?
Jeff: I absolutely quit my job. I became an entrepreneur entirely by choice which was interesting because back then the perception of an entrepreneur especially before the internet and celebrity entrepreneurs was what you just said, an entrepreneur is someone who just couldn’t get a job and had to do something.
Dan: That’s correct.
Jeff: You thought of it as a default, not a choice. “Crap, I got to eat, I lost my job, I’ll do something.” I kept thinking way back then wait this is my choice. This is what I want to do. I am not doing it by accident, I’m doing it on purpose but people didn’t understand it back then. So I quit my job because the corporate bureaucracy was suffocating me. I wanted freedom and I wanted independence and I wanted to just focus. One day we have to prepare something for all the vice presidents and my short visit to corporate America and I said, that just seems like a waste of internal time that I could be spending a solid problem for customers. And they are like well if you want to keep your job you got to please the vice president and I was like shouldn’t it be if I want to keep my job I got to take good care of customers? This doesn’t work that way. So what is aid was I can’t work here. I need to work in an environment where we don’t waste time pleasing the internal bureaucracy that we spend our time solving real problems from real customers and that’s why I just quit one day.
Dan: I see. Jeff when you think of an idea, how do you come up with the idea like what business—for someone listening well Jeff okay I get that, I want to start a business, how do you know if the idea is good or how do you come up with the idea?
Jeff: I think that’s another great question and the answer to that is for people to get more and more engaged in the environment around them. What people do is sometimes they are trying to sit at the quiet at their own office. That’s their environment, in the desk, just think up some problem to solve. The best way to do it is to get out of your office and go out in the world. There are problems everywhere. Also this, the difference between the entrepreneurs and everybody else’s we all encounter problems all the time in the world but entrepreneurs are people that see that problem and stop, everyone just goes home and complains. Entrepreneurs will stop and say, hey wait a minute this is ridiculous. For me in particular for example, inefficiency makes me nuts.
When some things is grossly inefficient and everyone is standing there and seems to accept that I turn in to the Tasmanian Devil from cartoons because I can’t stand it. So when you’re out in the world, the next time you see a problem, something you say that this is ridiculous, this is inefficient, fix it. See a problem and solve a problem. Stop and say this is not okay and everyone else is complaining about it, I’m going to be the one to do it. But entrepreneurs or would be entrepreneurs should do is to go out in the world, experience life, go places, see things, do things but then you will encounter problems that are frustrating when you do stop and say can I make this better for everybody.
Dan: Now Jeff one of the habits, one of the things I have learned from you is that you study things outside of our industry. Come spend the morning, maybe 20 minutes, maybe 3 minutes before we check our emails, before we return the phone calls, just to take a look at other industries, recent articles outside of our typical what we know and just to get some ideas to be a sponge of different types of information. Why is that so important?
Jeff: Yeah, I think that’s really an important point and I would tell you that for me, this came from studying successful people whenever I get a chance to be around successful, I try to figure out what is it that these people do that everybody else doesn’t, what made them successful and what habits they have that other successful people have that everyone else doesn’t because there might be some of those things and what you just talked about is one of them. I started to notice that the world’s most successful people, part of the reason they got that way is because they don’t live in a bubble. They look at a world that’s much broader than just their own.
The example I always use is if you are in the healthcare business, all day long you work with the healthcare stuff. If I ask you to go to a trade show for the banking industry or something you would say I am not in banking, I’m in healthcare so you wouldn’t waste your time. The problem is somewhere in the banking industry, they just implemented a brand new technology, a brand new solution to solve a problem yet you could have looked at it and said brilliant what they did in banking, I could be using that in healthcare. So people tend to stay with their bubble, coloring the lines and focus just in the industry and the problem in front of them.
What I propose is I was sponging is that every once and a while, even I do it 10 minutes a day but I do it every day in the morning before is after work, 10 minutes, take a look at what the whole of the rest of the world outside of your industry is doing and see if you can find some piece of brilliance that somebody else implemented that you can be the first person to apply the industry that you are in. that’s what I noticed that the leaders of the industry do as they find great ideas in the world around them and they adapt them to use in their industry before anyone else even see this.
Dan: Jeff share with us a little bit of the priceline.com. Of course, it’s a hugely successful story. I think that time, it was one of the fastest in US history to come from zero to 10 billion to market capita time. It’s an amazing story. Share with us how you came up with the idea and how you built the company so quickly.
Jeff: The original IP, the original business ideas alienated from a guy named Jay Walker. You know that company in Connecticut called Walker Digital. What Jay was doing was studying a business models, the business process and business process improvements. So I was part of that organization at that point too. So what we were all doing, was looking at and I would say this that each good idea, each new thing you learn is a puzzle piece and each puzzle piece on its own, doesn’t make a picture, neither does two or three. If you keep pushing the pieces around on the table, and you get enough of them eventually patterns form.
You can make something out of those individual pieces so at that time, we were looking at what seemed like desperate business concepts. One of them for example is a concept of stress inventory. The fact that selling distress inventory and all that means is the retail sales process didn’t sell. If you were selling laptops, you own a hundred of them and after you sold 80 of them that seems to be it. There is no more customers in the market that want one. There is 20 more in the shelf. Those are the distress items to get rid of those other 20 you got to do something different. You can’t just price them to the sesame customers. If I just bought five laptops from you for $2,000 each. You made 10 grand and then somebody else wants a piece and there are some leftover and you are not going to sell them, you can have them all for 50 bucks. Me, your platinum customer will be upset. You charged me retail price you gave it to that guy. (Some audio interferance).
So you are learning that one when that was just a puzzle piece. Now that you are talking about, learning about perishable commodities and talking about it. In fact for example when you have an item that spoils like a banana some people use these I forgot the term so I mean their countdown auctions. In the countdown auctions, the point is when I am selling a laptop and no one buys it today, it’s still the same laptop next week and the week after. But if I am selling a banana by Friday, it’s no longer edible, it’s black and you have to throw it in the trash.
So you might use a different technique by starting the banana at $3 and the next day it’s $2.50adn the next day it’s $2 because when you got to the last day, you might as well take a dollar when it’s kind of old instead of just throwing it out. So that was pricing systems for perishable commodities are different. So these are all disjoint pieces of knowledge about the world that our team out all those puzzle pieces together and at the end we came back and said hey wow, out of all this, we could create a distress inventory, perishable commodity, dynamic pricing system, which is what price sign was. It came from the mix of different learnings and applying a mix of different business processes and at the end when you put all those puzzle pieces together, it creates a completely new business together that wound up turning into a 60 something billion dollar company.
Dan: So basically is getting ideas, getting strategies, getting different pieces from different industries so as an entrepreneur kind of mix and match to see if there are something that we could do that maybe we are uniquely qualified and we can solve some problems in the marketplace.
Jeff: You got it exactly. One of my favorite stories that inspired me when I was just reading some business history stories was a guy many years ago in the fast food industry that their hamburger joint, their fast food places weren’t going and the owner told him, head guy try to find some way to do something different. You know be and he went in and he said I can’t make French fries faster, I can’t fill diet Cokes faster, I don’t know how to distinguish myself from the competition because we are all doing the same fries, the same reason, pouring the same Diet Coke at the same speed. So he took off and he said I am going to go see the rest of the world is up to just when I was just recommending and he went off and he looked at banks for the day.
When he got to the fourth bank he couldn’t park at the bank because there were all these pick up trucks out in front and piles of woods and nails hammers and carpenters and this fast food guy said to this guy in the bank’s parking lot what are you doing. They said we are building something. He said, what. They said we got this cool new idea we are creating the first one. He said what do you call it and they said we call it a drive thru window. So what was amazing was he ran back to his place and the first drive thru window in fast food history was created from a bank. No one in fast food thought of a window. Somebody in the bank did and when the fast food guy saw the bank said well we can do that, you just pull up your car up outside and order the food. So that’s the reason why it’s so important to info sponge. Take a few minutes every day in a week and see if anyone else in the world is doing something that you can learn from.
Dan: Jeff a lot of entrepreneurs I noticed they get into one of the things you talked in your books, Scale that they get into a self-employment trap. That they start a business just to give themselves a job or make a living. Instead of building a business they got this as a job. How can entrepreneurs avoid that mistake?
Jeff: Here is the trap and it’s not anybody’s fault, it’s obvious but no one ever sees it coming. The trap is when you start a company it’s only you so by definition you have to do all 11 jobs, paying the bills, billing people, building the product, selling the product, shipping the product, whatever it is.
Dan: Mopping the floor, everything.
Jeff: Yeah. At the beginning, you’re doing all of the jobs yourselves. So the mistake is, people get used to having doing that. The business is built around you and you do everything. So the problem is as the business grows, they never break that mold. They are used to doing that. One day they’ll wake up and they are like I am stuck in this business. I have to do 18 million things a day and I am doing more because the business is bigger and you know they feel like they are putting more hours for less results. The reason for that self-employment crap is that early on I admit I did this too. I learned it later. It’s that much earlier on, they should start saying today, I will do all those things but as soon as I can, I’m going to hire a product person. As soon as I can I’m going to get a marketing person. As soon as I can I’m going to spend the money on a janitor so I’m not going to have to mop this place anymore.
It’s the conscious effort to say, I am constantly scanning for people to do all these jobs so I can stop doing them. People smarter than me, people better than me and all of the areas so I can offload this but that’s not what happens. We are so used to doing it that we got stuck in that cycle that we do the same things all day and we are trapped in the business because you’re Atlas holding up the world. If you’re stop doing any of these things, no one else will do it and the business would really collapse so you’re afraid to let go and you’re stuck there. As opposed to the very beginning looking around and saying who else can do this and when can I hand it off to them.
Three-level Roadmap: Stage One
Dan: Another thing that I learned from you is that three-level roadmap, the three stages that every entrepreneur, every company goes through. Can you share that with us and so listeners would know this is where they are at and now what they should do to get to the next level?
Jeff: So tell me because we do that in a couple of pieces, I just want to make sure we are clear.
Dan: So the level one we have the pre-launch startup phase that’s when we focus on say planning the business, raising the capital, maybe even just getting feedback from the marketplace. That stage maybe it’s just an idea from entrepreneur to see an opportunity.
Jeff: Let’s start with that one. And we’ll go picture them together. Because what’s really important in that prelaunch stage is that people wait too long to get market feedback. I say, what do people think of a product and they say well I haven’t built it yet. I’ll show it to them and then I’ll get in and that’s already way late. So one of the most important things to do in that prelaunch stage is to get out of the office, identify by the way who’s that real customer is and where they lived. I want to give you an example, if you’re building a product that’s for teenage girls, you better be talking to teenage girls and their moms by the way, teenage girls and their credit cards talking to their moms. Way early and they start to say this is the thing I’m about to go build. I’m going to come back to you and show it to you, but what are your feelings on the idea in the first place? So as you can, you immerse yourself in the actual market with the actual market and actual users and start getting imprint.
I’m thinking to this, does this make sense to even care about that? Do you want one of these? Is there already a place to buy one of these? Engaging the audience where they are, not where you are. You know to some degree well I am not opposed to market research and scientific survey. Those things are expensive, one and two, there is this obviously a very famous definition of experiment which is that as soon as people know they are in an experiment their behavior already changes. I think that’s the same for a survey. When you hand somebody a survey, let’s say I ate in a restaurant and the restaurant gave me a survey and the survey said, what did you like most here and I wrote it down and then it said, what did you like least here. But I was actually really happy. I don’t have any problems but there is that stupid line and the pen in my hand and it says, tell me something bad so I’m going to come up with something because it’s a survey and I feel pressured to give you feedback that I don’t really believe in. That’s surveys.
There is 10 questions and I have to fill them all out and the real answer was I don’t care about question eight at all. That’s actually a much better information. So I don’t really care about this. I rather know that but I’ll never know that because since it’s on there, I handed you a pen you’re going to fill out an answer to number eight. The real answer was, no one cared. So surveys formal research, experiments, while they’re useful, people’s behavior changes when they know they are being surveyed. The best way to give input early on is being informal let’s go hang out with that customer in that market, where they live in just chat about this stuff. It is not rocket science and if it is and it takes 30 questions for you to see if someone likes your product, your product is going to fail anyways. Simple wins. Anyway that’s my advice to that prelaunch.
Dan: That makes sense. It’s almost when you are talking with a potential customer if they say that’s nice, that’s a good idea then we may have something we don’t know. But if they say where can I get some of those then you know okay maybe this would work.
Jeff: That’s exactly right. Now I tell you the other part. A lot of times when things where I was in the number eight question, what do you think about the whatever feature. How much do you like it on the scale of one to 10? The truth is they don’t even care about that feature, I’ll never see that because they will bubble in one of those numbers and I’ll see a lower umber but you don’t get the real answer that you do in a chat. Because sometimes you’re out there chatting and you’re like, wait you don’t think this is cool, they are like I don’t even care about that. You’re sitting there and I thought that was the coolest thing and all the 12-year old girls and their moms are like well that’s not interesting to us at all. You got to be in the marketplace as soon as you can just have those discussions and start to get those feedbacks.
Dan: Jeff I know that you even had a story where in I believe in your meeting that you have this potential customer in your marketplace that kind of a life size cardboard and have them sitting in chair. So those are the customers and kind of visualize every decision that we make has to be customer focused.
Jeff: Yeah so here is what we do I know that we told the story in Scale, in the book and the story is that I was gin a meeting with Sam Walton and Sam was telling me that everybody on Wall street, all the expert said you can’t build big box retail stores in small town America. It will fail—everybody said that so no big box retailers note anything in those small town America. Sam did anyway and Walmart I think literally one of the biggest bricks and mortar retailers in the planet Earth.
So my question to Sam that day was how did you know that would work because all the experts said it was suicide. Sam said I didn’t asked the experts, I asked the farmers in those little towns asked to know what they need here. They were very clear. We need diapers that is much cheaper. We need them here because our kids need diapers and we don’t want to drive all the way in wherever but we need them in bulk and cheap prices because we just can’t afford–whatever it was that they told him and he responded directly to them. I think that was a vivid illustration for me of the concept but wait a minute, I forgot. What did you asked me?
Dan: Your approach is always been customer focused.
Jeff: Oh yeah. So what we said was let’s say Sam told me to do is go hang out with farmers if you are thinking about your product so I would do that a lot in the early price line days especially when we were launching our consumer company. We spend a lot of time in grocery stores in K Marts and Walmarts trying to get around with those people that don’t live near us. You don’t know that customer form the other side of the railroad tracks and hang out with them the same way Sam went to talk with farmers in the diner when they are eating apple pie. The problem is you can’t go to the diner all the time, you have work to do.
They are not there so what we did is we come up with this idea is that we would create a cardboard cutouts and make them life size and out them all over the office. So everywhere you go your customer is there. You are always seeing them and thinking about them and feeling their presence. So you can glance and see. One of my businesses years ago our joke was, an Iowa farmer, that was our motto. An Iowa farmer can’t understand this we made it too complex. So we have to put an Iowa farmer and we would talk to this cardboard cutout and say, seriously do you have any idea what we ae talking about? The cutout imaginary friend and he would say, guys I am a simple farmer I don’t understand any of those words then I would tell my guys go back and new words told my guy can sense so. So we would put those cutouts there so we would never forget who that customer was, what they look like, where they come from and we would write things we know about the customer on the back.
It might have been things like he hates rock n’ roll music, she doesn’t like pastel colors. Staffing that at that time, you go who cares? We are not selling music, we are not selling art and then later you are building a website and the website has pastel colors and suddenly the customers don’t know why but they just don’t like it. So every little detail you learned about the customer we write on the back of these life sized cardboard cutouts so that we are as where we could possibly be of what our customer likes and doesn’t like so we try and create an environment that our company to fits the one they like.
Dan: It’s so simple but it’s so profound. On stage one, how would you know how big your idea could be and how fast it would grow? Do you look for problems that say millions and millions of people have then you know that’s a billion dollar company or that’s a billion dollar idea. How do you judge? How do you analyze?
Jeff: That is a major question that a market size—I would say the bigger question that people don’t understand, they don’t teach well anywhere as the most important one is the value equation. So I’m going to say even though Facebook Mark Zuckerberg gets rich, I don’t know if you know this story and how many people we told, they were probably about 90 days away from bankruptcy when that deal was done. Mark Zuckerberg did not get rich because customers love his product and bought a lot of it, he got rich because someone bought the company. That’s a different model.
You might get lucky and be a Zuckerberg but the better model is you have a value equation where people pay you so my point is let me tell you the example I always give people in value equation and this is a real one. These guys were telling everybody loves my product so therefore this is a great business because it’s a huge market. Why is it a huge market? Because everybody is we asked wants one. So let me give you that as an example. So I said to these guys we are in a room with about 500 people or something. I said really watch this ad I just read a story for real about a new technology developed that it’s a machine that makes diamonds, quite literally. So I said to everyone in the room, who wants a machine at home that you can make your own diamonds. Hundred percent of the audience raised their hands. And is aid see everybody loves my product. Because everybody I have ever asked do you want a machine that makes diamonds said yes and I said okay now watch this and said to all of those same people, I forgot to tell you they cost 20 million dollars. Who still wants one? Keep your hand up nobody’s hand stayed up and I said oh it’s worked. Twenty million dollars, it cost a hundred thousand dollars’ worth of resources to create a thousand dollars’ worth of retail diamonds and the rest of the hands went down. I said, wait you all loved product. I said to everyone, my product is a huge market 100% of the people I asked said yes they want one and yet I sold zero of them.
That’s the value equation is saying that there is something more than just does everybody want your product. The question is, is there a value that people would pay that’s more than what you spend on the balance. If you don’t have a value, it doesn’t matter if everyone in the world raised their hand because no one is going to buy one. The value equation comes from having enough people multiply it by the amount you could sell it for minute the amount that cost you to make and deliver it and if there is a chunk of money left over there now you got a scalable business.
Dan: Jeff it doesn’t always means that you know you have the Walmart approach kind of discounted products, little prices—that’s what Walmart is known for and then the other end of the continuum you have let’s say Nordstrom. You don’t go to Nordstrom because you want to save money. So you are saying that the value equation depends on the marketplace depends on their need so we have to come up with a proposition, a value proposition in other words.
Jeff: Exactly. On the left side of that value proposition was the product side. So when the Walmart is what you’re saying is the term is velocity. Can I get product velocity? Can I move enough diapers off the shelf because they are low margins and I am not making much money? So can I move enough of them fast enough that I even know that I only make a dollar on each package of diapers, I still sell a thousand of them an hour so I make a thousand of dollars. Then what Nordstrom is saying is, I am only going to sell two sweaters but I am going to make 500 on each of them an hour so they made their thousand of dollars by selling two 500 dollar items. Walmart made their thousand of dollars by selling a thousand one-dollar items. Whether it’s velocity or margin you just have to say do I have a business model that actually supports this where everybody like it.
Three-level Roadmap: Level Two
Dan: So there is two ways two go. That makes sense. Then after level one, and level two the early stage. Now the post launch startup, now we kind of want to focus on sales or marketing and kind pf how to make their first sale, how do we get to profitability. So what do we focus on at that stage?
Jeff: Say that again, I am not sure I want to make sure I understood the question.
Dan: Okay so level two, so now after the level one we have done our market research, we have talked to our customers now level two at the early stage, the kind of the post launch start up, now we want to focus on making the sale and getting to being profitable. What do we focus on entrepreneur at that level two early stage?
Jeff: So there are two things. Operational efficiency and go to market. So let’s start with go to market actually. So the got to market thing is you know you have the greatest product in the entire world and the only people who know about it are you, your mom and your sister. Market strategy, no matter how great your product is you have to have a machine, a system a network in place to distribute it. By the way I often use a singing example. Britney Spears is a very successful wealthy singer. Yet every day, every day in their shower before they go to their waitress job are millions of girls who are better singers. They are singing in their shower. All the way to their waitress job they are more talented than Britney Spears. Why is she where she is and they are where they are? Because she actually was part of a go to market strategy.
Around her were designers, were lawyers, were accountants, were choreographers, were marketing people, promotions people, advertising people, there was a go to market strategy that said what are all the puzzle pieces you need to launch this unbelievably big successful tour. And so somebody sat down, I was sort of part of it back then, we are a part of Britney Spears tour that we did. So I watched all these process. In fact my team was part of this process where we sat down on a giant whiteboard. We said, what’s the ecosystem? What are all the pieces required to go from Britney Spears singing in her shower to a big giant show in Madison Square Garden. You know what the parts are, just name them. You start writing down where someone is going to get someone who knows financing that’s going to get us some money, someone who knows how to budget who is going to write a budget, somebody who knows how to do set design who is going to design the show, somebody that knows how to do just logistics who has got a plan tour buses and trucks. Somebody that knows promotions who is got to be on the phone booking venues and arenas.
Someone who knows marketing got to create advertising and call all the radio stations. So that whole go to market strategy, who are you going to get there. Who do you need, what do you need, what are the not only the strategies but the tactics and you start getting more specific. We need to sell 10,000 tickets a night. At times x ticket price and if we can’t do that, the tour is not making money. So you start to define assumptions and objectives. Then who is going to sell the tickets and how. That whole comprehensiveness of your go to market strategy has a lot to do whether you ever go out of the shower or not.
Now the other part is I said was operational efficiency. The very first concert you put on or the product you ship is probably going to cost you a lot more than the other ones. My very first product, this is when we are building these airline ticketing kiosk, the kiosk that you get your boarding pass out of. We didn’t ship it, we put it at the back of the truck and we drove it because I was so worried that the first ticket printer we ever delivered be on time and work, for the first airline for the first airport. So I said you know what, as long as you guaranteed it’s on time is if we delivered ourselves which cost way more than shipping it when the three of us rented a truck. Rented a truck, put it in the back haul. The only way to guarantee success is we are going to sit there all weekend like in chairs across the way and watch it and make sure it never jams and everyone knows how to use it. So that ticket printer came with a thousand dollars’ worth of extra expenses. But as you start to ship them that thousand goes to 600 to 200 to zero. You have got to become more operationally efficient and automate your process and stop doing things you use to do that you needed to do for the first products in order to really scale and be profitable, it has got to cost you less and less the more products that you deliver into the market place.
Dan: That makes sense. Once we get into that stage that is profitable and sales are happening, people are liking our products then the level two middle stage is now things are happening but we are kind of the engine of the business with the driver of the business, everything falls in our shoulder. Now I guess the next step I think is what I have learned from you is now try to remove ourselves form the equation, the owner. From the equation.
Jeff: Yeah so now we are starting again is what I referred to much earlier is that when the owner is in the middle of all that stuff and the company is dependent on you personally be involved in everything that I just talked about, you’re a bottleneck. Because somebody says hey we are about to open the West Coast and you the owner said well I don’t have time to go to West Coast this week so you are holding that up and somebody says we want to start marketing this new product—so the more things are geared around you personally and required you to be involved as the owner, the slower your business is. You’re the bottleneck, you’re the inefficiency in the system. So you have got to start designing yourself out in front of it.
You have got to start hiring people and empowering them. Look you are 100% in charge of sales only call you if you need me, otherwise you don’t expect to do anymore sales calls. Your product manufacturing. Look your job is to get the product built, only call me if you need me. So you start bringing in people smarter than you and literally you have to be willing to hand over your business to them. Sometimes business owners say well that’s scary. I’m the only one who really knows how to run this business. I’m afraid to let him to do that. Then, you’ll never grow because you will be the inefficiency in the middle. You got to start handing things off, delegating trusting people then the other thing you have to do is start systematizing things.
Any function you do by hand that you can ask economy you got to look and say do we really need to type these in every time? Is there no way to do some kind of automated scanning and upload them? Everything that you can automate, you need to automate so people stop doing it. So that’s how you start screwing ourselves out of the business. Delegate your tasks, hire people that is smarter than you, automate things that you are doing that you don’t really need to do by hand and you know one day you will look up and say jeez I don’t even really have to come to the office anymore because anything works without me.
Dan: Then our role is just from a doer now it’s more like a leader. We want to lead the team, we want to build a team to point where like you said you know what, I don’t need to show by the office and that’s okay. The team is taking care of everything.
Jeff: Yeah your job is to design yourself out of the job functionally but you have a brand new much more important job culturally. Your job is to create a company that supports nurtures, appreciates and grows those people so they don’t leave. Once you find people smarter than you and they are doing a great job, the worst that could happens I they quite CEO or founder. My job was to build an environment at the company and the culture where these great people who can work anywhere they all want to work here. So you spend your job on building the support structure around those employees and just letting them do their job.
Dan: Now form your experience, what is the ideal compensation do you believe lie of course when public comes and stock options like things like that. How do you retain good people and like what would be a good compensation plan for them?
Jeff: well I could really address one part of that and that’s the equity piece. The salary piece of course there are so much market data now that the employees already know what is competitive and what is fair but the kin do people who are only working for a salary, you can’t really build growth around those people anyway because they don’t come at 9 and leave 5 and you won’t when you really need the extra effort you don’t get it. So growth is built around having people that have a much bigger interest and that really is represented by equity and so frequently I see on business owners and entrepreneurs whose strategy is to hoard all the equities for themselves. I always tell them good news is you own 100% of the company because you don’t share the equity with anyone.
The bad news is you own 100% nothing because you have no motivated employees and you never achieved excellence. What I always experience is very generous with equity so every employee comes in every day and says this is my company too, I own a piece of it and if it does well, I do well with it so I care. So I sue equities as ultimate incentives to tell people you own this place too not just me. You should care about who it does this. Let me start paying more attention to cost and things that I didn’t before so I think making people owners in the business even small amounts of equity is really, really it’s the most important part of motivation and compensation.
Dan: How do you determine like what percentages to give out? And also do you give them upfront or you wait until they perform and they prove themselves for a couple of years and you say you know what now I will give you some equity? When is the good time to do that?
Jeff: Upfront, everybody has to prove themselves. Everybody has to earn in. so equity staged, the only cases as you earn as you prove yourselves you continue to earn your equity. The only cases where you give some upfront is when you’re acquiring veteran all-star talents. If you are going to get somebody who is a big all-star that commands a lot of the market and has already proven themselves, in a lot of ways then those are the cases where you say look I needed some equity upfront just to join us. You are buying the talent and then they earn the rest. But for the most part, equity is earned.
Dan: So you make them buy equity or you just give it to them?
Jeff: No we always do low priced options.
Dan: So this are going to come from them as well?
Jeff: There is a strike price but it’s low. By the way there are the cashless exercise. I don’t know if you know what that is. But a cashless exercise says my options are one dollar a share but if I want my stock and I don’t have a dollar a share, then what we do is the company you know once that this is a public traded securities of course but the company or how the equity is sold, if it’s now an eight dollar a share, you just get that seven. You never really do have to buy them. You are buying them out of your own earnings once we cash them and take you cutout. So you did pay but you don’t have to pay it upfront. You pay of it out of the equity. So that’s called a cashless exercise so that’s a way for people to buy their shares but you have to cash them and pay off what you owe right off at the beginning. But yeah it pays at some skins of the game.
Three-level Roadmap: Level Three
Dan: Awesome, so we are past level two now, level two now. Level two advanced stage now we are growing now we want to scale the business to the next level. We have got systems in place, it’s not making money. We have got good people, we have got a good team, at this stage this kind of rapid growth stage, what should we focus on?
Jeff: Again, you focus on a couple of things at this stage. One of them continues to be personnel development. You have got to keep bringing in strong people, training them well and then empowering them. So the business could continue to grow every time you need a new division or new market, we are going to open Mexico, Latin-America, Europe now. I need a new person who runs Europe so you got to focus heavily on the talent development that you can trust to hand piece of the business to and say you’re on Europe go get it. So that’s part of it is continuing develop the talent you need for growth.
I think the other part is going back to market strategy. It’s you saying, should we take the product we already have and try to sell it in Europe or should we stay in the United States but develop a complementary product that we can sell a second product all the people in the US had already bought our first one. Those are the strategic decisions. If that level of strategy deciding what product to sell the product to who, where that got you to this product in the first place so you use the same thinking and my job is to look over the horizon and see where to steer the ship to next.
Dan: That’s also the job of the CO, the owner to come up with the overall strategy, where we are taking the company. The big overall vision.
Jeff: So you’re the cheerleader, the motivator, hirer but you’re also the strategist. But you’re not doing is actually see the work every day anymore. You’re not doing the work functionally you are playing that much higher role.
Dan: So I guess CEO, we shouldn’t be more in the lawn in front of our office then.
Jeff: You’re exactly right.
Dan: Then if we are good and then the timing is good maybe even lucky, now level three now the exit stage of the company. Jeff at this point do we sell the company or maybe we scale it up, when it is a good time to bring in outside funding? So you see a lot of tech entrepreneurs even in Vancouver but they are always talking about this new idea like a funding no traction whatsoever. They are always thinking well let’s just raise more money. Let’s just raise more money and that they burn through money so quickly. So from your experience when is a good time to bring in outside capital?
Jeff: When you actually can deploy it efficiently. A lot of companies go it’s money that they can’t really use yet. So they do that because they think that’s a common wisdom I am supposed to go and raise money. So good example would be I launch a product in the Mid-West, Illinois, Indiana, Iowa—I’m a just making up an example. The product is doing really well. We got all the bugs out of it. We know how to service it, we’re faster at delivering it, so the product is out in the marketplace and in the mid-western, it’s all opening.
What I always say when it is time to go in passion, when now I am ready to take something that works and do it nationally, what I need is a team of sales people in three other parts of the country. That’s when you want to go raise money. What you need the money is for you know how to use it, you know where to deploy it you have already proven that the model works you just need money to launch it. I’ll just use an example. So rapid market expansion is one of the great examples of good time and place to deploy funding.
Dan: Now Jeff also then what about for entrepreneurs because I know that’s one thing you believed that as an entrepreneur we shouldn’t just chase money, we should chase excellence and all the businesses that you started, what drives you? I am curious.
Jeff: Well it changes at different times. That’s the good news. Every goal you have doesn’t need to take your whole lifetime. You can have some lifetime bucket list but you can also have some shorter ranged goals, three years from now I want to get this done and that and when you do that, three years from later you get to do another one. So I always have shorter term, three or four years kind of goals. When you finish one you do another one.
There were times when I was all about launching businesses and at this point in my life, what excites me the most is again I just have to be honest Dan I have been really lucky, I was blessed to achieve a lot of my own dreams, there were things on my list that I dreamed about that I hadn’t been able to actually realize so now what’s important to helping other people to realize their dreams. So I spend a lot of time mentoring. I had to try to help other people to get wherever it is they are trying to go. That’s what motivates me today. The best days I have are when somebody sends me a letter says you know I have achieved whatever their dream is it doesn’t matter. I achieved what was really important to me and you help me get there. That means a lot to me now.
Dan: So it changes in different stages. So in the beginning just want a bit of freedom and you say you know I want to be my own boss and make enough money to do that and later on you want to launch companies and build something massive and as now today it is more focused on people then I guess, helping developing individuals, helping them grow and nurture them.
Jeff: Right and t might be early on it maybe money for you and another point it might not be money but impact, legacy. I want to change this industry, I want to make this mark and then later on it might be you’re getting back. I want to help other people. So again those things change at different points in your life.
Dan: Now Jeff you met a lot of amazing and like you mentioned Sam Walt and a lot of amazing entrepreneurs maybe can you share with us that who is the most fascinating and incredible entrepreneur that you have met personally and what have you learned from them?
Jeff: Well interesting somebody asked me that and by the way I got about four minutes left because I am going to lose you Dan. To me and I have spent time with people like Richard Branson and Donald Trump and Steve Wynn, the guy that built Las Vegas or whatever, but it turns out my favorite entrepreneur is one you have never heard of. My favorite entrepreneur is one in the middle of nowhere where not only is there no food or electricity or running water but there is a scarcity of hope and there is somebody out there with unbridled enthusiasm, and figuratively a shovel in their hand digging saying I know I can fix this, I know I can make it better. So in this last few years when I was travelling around the world to help entrepreneurs I have been meeting people that will never be famous, never be rich, never get a spotlight and you can’t believe they even have the strength to get up again and the energy to believe again and they are out there doing amazing things.
So that’s my favorite entrepreneur is the one that you have never heard of. It’s the young man or woman that is doing incredible thing sin an environment where you can’t believe it’s possible to do that. I have been very blessed to meet a lot of these people in my travels over the last few years. These are people that inspires me every day. There are days where I leave some of these people and I think wow what have I done. They make you feel like you have been still all the time even if you’re busy so those are my favorite entrepreneurs the ones that have no reason to go on but they do it anyway.
Dan: Awesome. Jeff nay final thoughts n how can our listeners if they want to find out a little bit more about you or they want to get a copy of your book, what’s the best way for them to do that?
Jeff: Our book, Scale is available everywhere. You can get it online and Amazon or in the store Barnes and Noble and etc. You know I have a website where I track my own activities which is just literally just jeffhoffman.com. I will say I am a huge LinkedIn user because a lot of people in LinkedIn like me ask me to keep them updated on what we are doing business wise and entrepreneurial wise so find me through whatever methods.
Dan: so go to Amazon.com. Definitely get Jeff’s book. I mean it’s just an absolutely incredible book and can connect with Jeff on LinkedIn as well. Well Jeff. Thank you for taking the time. Thank you so much for inspiring us today. I know you have been very busy and thank you for taking the time to do this. And thank you for inspiring us with your story and your generosity in sharing your thoughts and ideas I appreciate it.
Jeff: You bet Dan. Thank you very much for having and I look forward to talking to you again.
Dan: You got it. Thank you Jeff.