Reid Hoffman is a Silicon Valley power player. He emerged at PayPal, where he was the first full time employee, but is perhaps better known as the co-founder of LinkedIn. The sale of PayPal and IPO of LinkedIn have made him a multi-billionaire, and he has poured that wealth back into startups as one of the most prolific angel investors in the Valley. More recently he became a full time venture capitalist at Greylock Partners, where he runs the $20 million Discovery Fund, making seed stage investments in young tech companies. We chatted with him in Washington, D.C. where he was reciving a leadership award at the annual Computerworld Honors. You can find him on Twitter at Quixotic.

Editor's Note: Right after we interviewed Mr. Hoffman, the news broke that more than 6 million LinkedIn passwords had leaked on a Russian web forum. LinkedIn users have filed a class action lawsuit over the breach. We reached out to Mr. Hoffman for comment, and his reply is below.

What is your takeaway from the recent password incident at LinkedIn?

We take all matters relating to our members’ privacy and security extremely seriously. We have been working round the clock since the list of stolen passwords first came to light. Based on our investigations, all member passwords that we believe to be at risk have been disabled. We’re continuing to work with law enforcement as they investigate this crime. Because it’s good practice to change your passwords on any website you log into every few months, we have provided instructions to all our members on how to change their passwords to take advantage of increased security measures that LinkedIn has already implemented, such as salting.

Tell us a little bit about the future of LinkedIn's business.

Over time you will see more coming out of LinkedIn as a platform, with apps built on top. There is a light platform that is currently on the site, and you can see the beginning steps. For example "Apply with LinkedIn," which lets companies set up one-click hiring, where a candidate can import their whole resume and CV with a single button. That is the beginning fragment of what we can do.

Where do you see exciting investment opportunities?

Two of the most recent investments I did were Wrapp, social gift cards, and Edmodo, a social network for grades K-12. One of the things that happen a lot in Silicon Valley is people tend to say, "Oh this movement is done, they want to move on to the next hot thing, social is over, it's last years news, blah, blah, blah." I actually think those trends are not fully played out yet. The social network for K-12 is very different from LinkedIn or Facebook; it is driven by connections between teachers, students and parents.

"Data is being constructed constantly and everywhere."


Do you think crowdfunding, and the wave of funds it will bring, is going to change the venture capital business? The Pebble smartwatch was turned down by VCs, but raised over $12 million on Kickstarter.

The more things change, the more they stay the same. I thought about buying a Pebble Smartwatch myself, but even with $12 million in orders — even if that was part of the pitch — I might not invest, because we don't know the margins. Classically, consumer hardware goods are very bad venture investments, because you need to be a huge company with a supply chain and big marketing budget. I think the transformation of hardware supply chains, open hardware, and hardware/software combinations are fascinating, and may make it more viable. But for venture, you need an efficient return on capital, and that is very difficult with physical products.

What impact do you think the Facebook IPO will have on the next wave of tech companies trying to go public?

There is a hope among investors that getting into an IPO is easy money. The fact is there are big risks; that's why we call it an investment. I think the Facebook IPO will probably cause delays — although hopefully not a closing of the IPO window — for younger tech companies. All the sturm and drang around the Facebook IPO... How do I put this... a company goes from a twinkling in the eye to a $70 billion company in seven years, that's pretty impressive. Yes, it may now be below the IPO strike price, but it has emerged as one of the internet giants and we need to see where it goes in three to five years.

The Facebook IPO process was really challenging, because all players involved had never seen retail demand like it, everyone was calling their brokers saying, "I have to get some Facebook shares," and they were like "Oh shit, how big is this going to be?" The company was trying to avoid an out-of-control run up. They lowered guidance, they increased the offering, they did all these things to keep it sedate, and not knowing quite how to measure the retail demand. In retrospect, they should have gone out at a lower price to avoid weeks of PR headache.

What do you see on the horizon that excites you?

"When mobile phones came out, people were horrified."

A few years down the road, I think that there is an interesting set of revolutions coming. It's not just Kickstarter that enables the Pebble Smartwatch; you have different manufacturing processes, just-in-time construction, 3-D printing of bespoke goods, patterns of open source tied to hardware, with hardware as a commodity and the software on top creating the real value.

I think people still underrate the importance of open source and how that is changing our industry. People say, "oh that was a decade ago." No, it's still critical, and those techniques applied to hardware, given the innovation that came about in software because of it, I think the possibilities in hardware are just as massive. If I just use this 3-D prototype, or this open source library, I can move a whole lot faster building this new physical product.

The cost of sensors are trending to zero, just like the cell phone camera, and so data is being constructed constantly and everywhere. It's not just a question big data, which is a bit of a misnomer. Yes, volume is important, but it's the fact that it's human-indexed that's really critical. The data knows who you are and where you go and that it was you that took this picture. That makes the data relevant and important to human beings. In turn, every device becomes something of a software device, so in three to five years your car will have more lines of code in it than LinkedIn does today.

What's holding that revolution back?

There are privacy concerns, but that lines moves. If you described the photo sharing process on Facebook to people a decade ago, they would have thought you were crazy. Now people like it, or are used to it. The data helps you navigate life. With real time traffic you could reroute around accidents. Think about navigation of other spaces. What skill should I invest in, what career should I go into? I have these symptoms, what drugs should I be taking? What behavior should I change?

I think the key to being a great investor is to keep your eye on the moving line. If there is real upside, and limited downside, people will want these things and the technology will transform our lives. If you describe it as 'your phone is tracking your every move,' people think, 'oh shit that's not for me.' But if you explain to them, you can figure out how to get around a traffic jam, or navigate to the hot new restaurant, a thunder storm is coming, and your friend is just a few blocks away, then they see the value and they adapt.

When mobile phones came out, people were horrified. "Oh my god, you could be interrupted at any time? What happens to you privacy?" Now people can't live without them. I have two phones. Actually, I have five!

Photo credit: Joi