Six months after Microsoft announced plans to pay more than $26 billion for LinkedIn, we now know even more about why the career-focused social networking site was so valuable. Today, Microsoft revealed that LinkedIn founder Reid Hoffman has joined its board. It’s impossible to overestimate the significance of this move for Microsoft. CEO Satya Nadella is three years into a turnaround that few people believed possible. When he was promoted to CEO in February 2014, Microsoft was in a bad place. Six months earlier, the company had posted its first-ever quarterly loss. Steve Ballmer announced he would step down, but before leaving, he pushed through the acquisition of Nokia. It was a costly mistake. Microsoft ended up paying $7.9 billion for the Finnish cellphones maker, according to an April 2015 SEC filing; the company wrote off nearly the entire sum in the final quarter of 2015.
Microsoft’s chief problem was this: Though the Redmond-ites made a lot of money, the company’s core business was declining, a dynamic that was set in motion more than a decade ago, when nearly every enterprise owned and ran Windows-powered PCs and servers. Microsoft had parked itself in the middle of Innovator Dilemma-land. The company had little incentive to invest in future businesses that might disrupt the business it was already in.
It also had a lousy reputation, particularly in Silicon Valley, where camaraderie and collaboration are hallmarks of tech’s evolution and every major player enjoys frenemy status with its adversaries. Microsoft wasn’t a company that partnered with outsiders. It scorned the open-source community and looked down its nose at tech upstarts. In a public conversation with Marc Andreessen in October 2014, investor Peter Thiel called Microsoft a bet “against technological innovation.”
In an early analyst call, Nadella quoted philosopher Friedrich Nietzsche, telling listeners that Microsoft must have “courage in the face of reality.” Three years later, this courage is paying off. Microsoft has been profitable for the last four quarters, and in January, it surpassed analyst expectations, doubling its revenue from its cloud-computing offering, Azure. Its search engine, Bing, has a hold on one fifth of the search market (even more, if you add AOL and Yahoo search, which are powered by Bing). With the launch of Microsoft Teams, it has aimed squarely at competitor Slack. It’s well on its way to transforming into a company that sells services in the cloud. Meanwhile, it has put $35 billion toward R&D for ambitious projects such as its mixed reality headset, the HoloLens, attempting to establish itself as a company that can bring credible innovations to market.
To succeed, however, Nadella must do more than fix the company’s business. He must turn around Microsoft’s lethargic, boastful, go-it-alone reputation — especially in clubby Silicon Valley where deals are made over dinners, the most talented entrepreneurs have their pick of big-name investors, and talent is hard to woo. In the constant competition over engineers, designers and product managers, Microsoft must establish itself as a smart place to do great work. In other words, in Silicon Valley it’s gotta be cool.
There’s no doubt Nadella has improved the company’s relationship with developers, partners, and investors outside its Redmond headquarters—particularly with those in the Valley. The company made peace with the open-source community, and one of its top engineers even said it wasn’t out of the question that one day Microsoft could open-source the code that underpins the company’s Windows operating system, its crown jewels. Nadella has also spent the past few years getting to know the startup founders the company once ignored. In October 2014, I went to hear him speak at a developers’ conference in London and witnessed firsthand the new amiable approach he was advancing. Since then, he has only amplified his efforts. But even if they’ve enjoyed a warmer reception in recent years, Nadella’s team of top executives and board members are, for the most part, not valley insiders. (The exception would be former Symantec CEO John Thompson, who chairs Microsoft’s board and helped with many Valley introductions early on.)
Enter Reid Hoffman. Hoffman earned his credentials over two decades of startup building and nurturing. He started the very first social networking website, Socialnet.com, back in 1997 when Mark Zuckerberg was still in middle school. He met Facebook’s plucky founder before the kid dropped out of Harvard, and he helped broker the startup’s first $500,000 investment (kicking in $40,000 of his own). He was a founding board member at PayPal, and helped start LinkedIn back when most execs thought the idea of exposing your little black book was career suicide. LinkedIn now lays claim to more than 400 million members. In 2010, Hoffman joined venture firm Greylock, managing a seed fund that has invested in Groupon, Dropbox, Pandora, Tumblr, Shopkick, and Airbnb, where he’s a board observer. His list of for-profit and nonprofit board seats is lengthy.
There are few people in Silicon Valley as connected to its heart as Hoffman. In fact, Hoffman may be the Valley’s heart—a rhythmic muscle responsible for the optimal circulation that keeps it in good health. With a phones call or an email, Hoffman can get just about anyone in tech within minutes. He knows who to call. And in a competitive industry, he has gained his reputation through trading favors. He’s the quintessential nice guy. A few years ago, I called up entrepreneurs to ask them about Hoffman for a profile that never ran. Serial entrepreneur Bret Taylor told me, “He spent so much time just being a nice guy, and it made me think I have to be that way, too.”
At the time, I asked Peter Thiel what made Hoffman tick. “Once years ago, the question came up about the meaning of life,” Thiel told me then. “He said he thought it had something to do with the relationships you build along the way.”
Hoffman and Nadella met shortly after Nadella was appointed Microsoft’s CEO. “He was tapping me as the Silicon Valley expert, and I was tapping him as the leader of this massive technology company that had a huge amount of impact on how corporations and organizations worked,” Hoffman told me in an interview when the LinkedIn acquisition was announced. Increasingly, their conversations turned to leadership issues. Hoffman was impressed by the culture Nadella was building at Microsoft.
As a board member, Hoffman will be Microsoft’s ambassador in the Valley. Among a core group of constituents for whom Microsoft may not factor into conversation, Hoffman will work to raise its profile. The trickle-down effect has the potential to be tremendous as Microsoft competes for partners and talent.
The importance of reputation to a successful turnaround cannot be understated. As evidenced by Uber’s recent debacles, reputations are stubbornly difficult to dislodge. Even if a business has a sound foundation, how people view it will have a strong impact on whether it can succeed. And when Reid Hoffman calls an entrepreneur or an engineer on behalf of Microsoft, you can bet they will take it more positively.
