Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies
While scrolling my Twitter feed I saw that Y Combinator promoted Reid Hoffman’s new book about something that was called Blitzscaling. I am a sucker for books with catchy titles so I immediately ordered the book.
Who should read this book and why? If you are an entrepreneur, investor or just interested in the subject — this book will give you a deep insight in the latest strategies and techniques about how to go from idea to start-up to scale-up and finally how to reach the top as a market leader.
”Of all the things I’ve discussed with Reid, the most thought-provoking might be blitzscaling, […] Reid and Chris’s ideas are more practical than ever, because it is now possible to get big fast in a way that simply wasn’t feasible a few decades ago, […] the tools you’re about to gain have never been more relevant. This is an ideal moment to be reading this book. I’m glad Reid and Chris are sharing their insights.”
— Bill Gates
So tell me, what is blitzscaling?
Blitzscaling is a strategy and set of techniques for driving and managing extremely rapid growth that prioritize speed over efficiency in an environment of uncertainty.
But almost every start-up wants to scale fast, exactly how is this different?
Regular fast scaling is using the classical approach in business strategy that says that the risks taken shall be calculated ones that you can both measure and afford. This technique will inherently prioritize correctness and efficiency over speed. We’ll soon go into the details and clarify this difference further.
So why is this important?
Efficiency and certainty are very important for stable and established markets. But in the context of new markets encountered by the inventors, innovators and disruptors of the world this strategy is suboptimal. When a market is up for grabs, the real risk isn’t inefficiency, it is playing it too safe.
As you all know, first prize is a Cadillac Eldorado. Anyone wanna see second prize? Second prize is a set of steak knives. Third prize is you’re fired. Get the picture?”
— Blake (Salesman from the movie Glengarry Glen Ross)
First prize in the first wave of consumer social networking went to Facebook; second prize to MySpace; third prize to Friendster. You need to win first prize in order to survive in the Internet era.
This is especially true for businesses that cater to two user groups that benefit from the network effect — for example, Airbnb who both needs hosts as well as guests.
The reward might outweigh the risks
It is not to be forgotten that this strategy involves a substantially higher degree of risk. However, this risk fades in the presence of the even higher risk of being too slow.
This is not the same as getting big quick. To mitigate the increased risk, one should employ certain techniques, and this is what blitzscaling is about.
The ingredients of blitzscaling
Besides courage and skill from the entrepreneurs, blitzscaling requires two essential ingredients — human capital and financial capital, and an environment that is willing to supply this.
You can think of them as fuel and oxygen; you need both of them to propel the rocket skyward. The structure of the rocket is your organization’s infrastructure which is what you are constantly rebuilding as you rise.
The role of the leader is to provide a continuous supply of fuel and oxygen while also making necessary mechanical adjustments while it is accelerating to keep the rocket from plummeting to the ground.
So blitzscaling is a certain strategy and a set of techniques to promote massive growth, cool. But exactly when do I use it and how does this relate to my business?
We’ll get into this more in depth later on but let’s still your curiosity a bit for the time being. The only time that it makes sense to blitzscale is when speed is the critical strategy to achieve success. And also, these three following conditions must be met:
- The product/market fit is right
- You have a working business model
- The market conditions are right for hypergrowth
Let’s compare blitzscaling to three other types of scaling
Classic Start-up Growth — prioritize efficiency in the face of uncertainty. Gain as much information as possible to increase certainty about what Eric Ries and Steve Blank call product/market fit while using as little resources as possible.
Classic Scale-up Growth — prioritize efficiency in an environment of certainty. This is a good strategy to maximize the return on investment in a stable market with little unknowns.
Fastscaling — prioritize speed in an environment of certainty. The risks and costs are well understood and predictable because of its stable environment. One can rather comfortably sacrifice efficiency for the sake of scale. Good for gaining market share and to achieve revenue milestones.
Blitzscaling — prioritize speed in the face of uncertainty. It is “do or die”. Achieve either death or success in a remarkably short period of time by either establishing oneself as the market leader or fail.
There are three basics of blitzscaling
1. Blitzscaling is both an offensive strategy and a defensive strategy
We’ll start with the offense. First, you can take the market by surprise and bypass heavily defended niches. An example of this would be Slacks explosive growth that blindsided competitors like Microsoft and Salesforce.
Second, you can build a long-term competitive advantage. Third, in the position of being a fast-growing market leader, securing more backing from investors that you will use to boost your growth ever more and leaving your lagging competitors behind your smoke.
On the defense — your competitors will have trouble keeping up with your pace. Often they will have to try to play catch-up with you.
2. Blitzscaling thrives on positive feedback loops
The company that grows to scale first reaps significant competitive advantages. You attract what you are, so when you soar to the top and emits success, you will attract success. Success in the form of capital and the best talent.
3. Despite (because of) its payoffs, it also comes with massive risks
The term for out of control growth in the human body is called cancer. The same is true for business. You want your organization to grow in lockstep with your revenue and customer base. Otherwise, different parts of your organization will lag behind.
The five different stages of blitzscaling
When a startup grows, it does not equal multiplying your company with an ever increasing number. What got you to one step won’t get you to the next step in terms of strategies and techniques.
There are five different stages in a company’s growth (stated below). Each and one of these steps has their own management and leadership.
We will use the different names throughout the article to reference the specific stage of a company.
The three key techniques of blitzscaling
Technique #1: Business Model Innovation
Despite the common belief of the nerds of Silicon Valley that uses their engineering skills to build amazing products and bases a company around that — the truth is that the people behind these companies are almost always business nerds too.
As the world has progressed technology-wise, the technology behind companies is not a differentiator anymore. The way that start-ups may compete against established competitors with more fuel and oxygen to their rockets is just that, business model innovation.
Dropbox founder and CEO Drew Houston state that you can not rely on better technology or outexecuting your competitors. He goes on and says that:
“If your playbook is the same as your competitor’s, you are in trouble, because chances are that they are just going to run your playbook with a lot more resources!”
Technique #2: Strategy Innovation
Obviously, when blitzscaling, the goal is extreme growth. Most start-ups have the goal and the wish to achieve this but lack the understanding of how to actually implement the right strategy for this cause.
A definition of success when blitzscaling would be to achieve a competitive advantage by using the network effects to scale the business to a critical point that triggers a positive feedback loop that allows it to dominate a winner-take-all or winner-take-most market and gets a long-lasting first-scaler advantage.
An example of a strategy that prioritizes speed over efficiency is Uber’s aggressive city-to-city expansion strategy. Uber needed to get to a critical mass of users quickly to really be a valuable service for the citizens of the new city.
To achieve this extreme growth they provide heavy subsidies to both its drivers and riders. They boosted the drivers’ salaries and lowered the price substantially for its riders.
Another example is what Disneyland could have done. They could have lowered its ticket prices with 90% and predict that through network effects one million visitors would attract ten million visitors and thus in a later stage making up for the initial losses.
A reason for why silicon valley investors are so successful is their relentless strategy of extreme growth and their willingness to take big risks.
If a company does not display the wanted hockey stick growth curve they will conclude that they will either sell the company or invest more money to either reach the top of its market — or end in a big failure. A warning sign for them would be if a company displays anything less than a 40% annual growth.
Technique #3: Management Innovation
The traditional strategies that are working for a company that happily grows by 15% annually do not work in the fast-growing blitzscaling companies. And it is not comfortable to triple the number of employees each year.
This requires radically new strategies that include being comfortable with hiring good enough people, letting fires burn, ignoring angry customers and launching flawed and imperfect products.
These were the three parts that together create the high-risk high-reward situation that you will find yourself in while blitzscaling. Now let’s dive deeper into each subject.
Business Model Innovation
This is the first and most foundational technique when building a business capable of growth; to be able to build an innovative business model.
This becomes clear when looking at the dot-com era around the 2000’s when many companies became digitalized.
Why didn’t Walmart dominate e-commerce instead of Amazon? Why didn’t the existing newspaper and phone book companies dominate instead of Google? The answer is the title of this paragraph.
The startups of that era that relied on technology innovation without any real business model innovation went bust. The real value creating and what is needed for a successful startup is to combine innovative technology and innovative products or services with innovative business models.
Great business models often seem like a bad idea at the time, because inherently in its very definition it cannot point to any existing business model that has been proven.
So when designing your business model you should maximize the following four key growth factors: market size, distribution, high gross margins, network effects.
You should at the same time minimize the two key growth limiters: lack of product/market fit and operational scalability.
A brief overview of the growth factors and growth limiters
Let’s start by looking at the growth factors before moving on the growth limiters.
Growth factor #1: Market size
A big and/or growing market has both a large number of potential customers and a variety of efficient channels for reaching these customers. The last part here is important, and we’ll look a distribution later.
One of the main sources of uncertainty of blitzscaling is predicting the TAM (Total Available Market) but to get it right and invest accordingly is one of the main opportunities of high returns as in the cases Uber or Airbnb.
When raising capital from a VC-firm one should bear in mind that the investors of Silicon Valley are looking to triple their investment over the typical seven- to ten-year life of a fund to achieve an above-market of internal rate of return of 15 to 22 percent.
So if you’ve raised $50 million the market must be able to return you $150 million during this time frame.
Growth factor #2: Distribution
Building an “insanely great” product as Steve Jobs would say is not enough. If we would compare a great product with poor distribution and a good product with great distribution, the latter would win. As Drew Houston, CEO Dropbox said:
”Most of the orthodoxy in Silicon Valley is about building a good product. I think that’s because most companies in the Valley don’t survive beyond the building-the-product phase.
You have to be good at building a product, then you have to be just as good at getting users, then you have to be just as good at building a business model. If you’re missing any of the links in the chain, the whole chain is broken.”
The two main distribution techniques fall under two main categories: leveraging existing networks and virality.
Leveraging existing networks
New companies seldom have the resources to pour money into advertising campaigns so they have to be creative.
One way is to piggyback on existing networks. An example of this is how PayPal offered their payment service on eBays platform and thus tapping into its big pool of existing users.
Virality happens when one user brings in another user and so on. It can be organic or incentivized by some kind of reward.
Once again looking a PayPal, they got organic virality in the normal use of the product — one had to create its own PayPal account when receiving a payment from another PayPal user.
They also used incentivized virality. If you referred a friend you got $10 and your friend got $10. This kind of monetary incentive will decrease as you grow. PayPal decreased their incentive from $10 to $5 and eventually removed this reward.
Virality almost always requires that the product or service is either free or freemium, otherwise, the threshold for signing up would be too high.
Growth factor #3: High Gross Margins
Most of the biggest tech companies have a gross margin of 60, 70 or even 80%. This allows for a large asset in cash to use directly. An important difference is the difference between potential gross margin and realized gross margin.
Many blitzscalers maximize the potential gross margin and minimize realized gross margin to maximize market share.
For example, Xiami aims to have a realized gross margin of about 1–3 percent by using the resources on growth. As Jeff Bezos said: “Your margin is my opportunity”.
Growth factor #4: Network Effects
This last factor plays the important role in sustaining the growth long enough to build a massively valuable lasting franchise.
We’ll use the following definition of network effects: ”A product or service is subject to positive network effects when increased usage by any user increases the value of the product or service for other users.”
There are five different types of network effects as seen below.
Direct Network Effects. Increased usage increases the value of the service. (Facebook, WeChat, WhatsApp)
Indirect Network Effects. Increased usage encourage increases consumption of complementary goods. (Microsoft Windows, iOS, Android)
Two-Sided Network Effects. Increased usage from one user groups benefits the other and vice versa. (Marketplaces, Uber, Airbnb)
Local Network Effects. Instead of getting benefits from a general increase of usage one experiences benefits from the increased usage of a small subset of users. (A part of a forum that you are especially are interested in)
Compatibility and Standards. The use of a product creates an incentive to use complementary products within the same ecosystem. (Apple, iOS, Mac)
With network effect businesses you have to acclaim a critical mass of users for the service to provide its intended value for its users. This is why distribution is so incredibly important for success.
If looking at it from an economic standpoint you can say that the demand curve needs to intersect the supply curve, which is called the “tipping point”.
In Geoffrey Moore’s Crossing the Chasm, he recommends that startups focus on finding niche beachhead markets and then expanding out using the “bowling pin” strategy.
Now let’s move on the growth limiters.
Growth limiter #1: Lack of product/market fit
Marc Andreessen argues that this is the most important factors for successful startups and defines the product/market fit as:
“Product/market fit means being in a good market with a product that can satisfy that market”
A good strategy to follow here is Lean Startup made famous by Eric Ries. And a key question a new startup needs to answer is the following:
“have you discovered a nonobvious market opportunity where you have a unique advantage or approach, and one that compelling competitors won’t see until you’ve had a chance to build a healthy lead?”
And how does one find such opportunities? There are a couple of things to look for and are connected with a change in the market that incumbents aren’t willing or able to adapt to. This can be:
- Disruptive innovative technology
- Change in laws or financial regulations
- The rise of a new group of customers
- Any other major shift in a market or industry
A good article exploring these kinds of opportunities further is this one.
Proven business model patterns
- Bits instead of atoms: easier to scale and distribute.
- Platforms: can reap the benefits of compatibility and standards (network effects).
- Free/freemium: play an important role in starting network effects.
- Marketplaces: powerful because it often taps into two-sided market effects.
- Subscriptions: predictable revenue streams making it more predictable and enables more aggressive long-term investments.
- Digital goods: often nearly 100% gross margins.
- Feeds: drives ad revenue and long-term retention.
Below are some of the strategies mentioned in the book that are easily digested. I thoroughly recommend you to read the book to the get the whole picture if you find this interesting.
There is a big new opportunity
To achieve massive success you need a big new opportunity where there is a big enough market and where there isn’t a big market leader or oligopoly.
This is often the case where there is new innovative technology that creates a new market or scrambles an existing one.
You have competition
Ask yourself: “can someone else realize this opportunity before me?”. If the answer is yes, the risk of moving fast diminishes before the risk of being too slow.
The more intense the competition, the faster you should move. If there are no advantages to moving faster, it is better to follow the traditional strategies for the time being.
So tell me more about how blitzscaling differentiates from regular fast scaling?
The (obvious) fact is that every startup is trying to achieve the fastest possible growth.
For the two first stages, Family and Tribe (between 1 and 100 employees), it can be a challenge to move faster than your competitors. But it can be done and There are only three ways to do this:
- You might be the only competent player in the market. (Could be hard when good markets attract competent people)
- Be the first in your market that figures out a brilliant growth strategy (such as PayPal did)
- Pursuing scale more aggressively. (Raising more funds, hiring more people, anticipate growth and build infrastructure that supports that growth in the future. In other words, bet all your chips on this bet.)
This is the third and last of the three key techniques of blitzscaling.
There are different people in different stages
The Marines take the beach, the army takes the country and the police govern the country.
The start-up people (Marines) is the people that are used to chaos and improvisation. Once the beach is taken, the scale-up people (army soldiers) knows how to quickly take territory. Last in are the stability people (police force) that maintain rather than disrupts.
Generalists to specialists
For a long period in a startup, employees need to be able to wear many hats and be flexible. You should only hire generalists in the Family stage (1–10 employees). In the Tribe stage (10s of employees) you might on rare occasions hire a specialist in machine learning or a data scientist.
However, in the Village stage (100s of employees) it is wise to start focusing on hiring more specialists. In the City or Nation stages, almost every new hire will be a specialist.
”If this is a decision based on opinions, then my opinion wins. However, data beats opinion. So bring data.”
— Jeff Bezos, CEO Amazon
In the stages of Family and Tribe, it is hard to make data-driven decisions when you might not have that many customers to analyze. In that case, it is best to use intuition (knowledge and experience).
However, a good practice is to start collecting data as soon as possible. So what kind of data to collect?
First of all, Selina Tobaccowala from SurveyMonkey says that she strongly believes that a company as a whole cannot get behind more than three to five metrics.
The main metrics to track include the number of users, raw engagement and churn. And according to Hacking Growth, you should pick a North Star metric that will help decision making easier to keep you aligned with your goals and to track progress. For example, at Google, their North Star was the number of hours watched each day.
Some fires will have to keep on burning
“What you say ‘no’ to is more important than what you say ‘yes’ to”
— Joseph Ansanelli from Greylock Partners
To decide which fires you will let burn you will need to prioritize by urgency, efficiency, and dependency. First ask yourself: “which fire is going to damage or kill my business the soonest?”.
Regarding efficiency, you will need to think about which fires you have the ability to extinguish right now and which ones a better to deal with later.
And lastly dependancy. Will extinguishing Fire A make it easier to extinguish Fire B or C?
The list below is the Maslovian hierarchy of fires that start with the most important ones in the top.
- Revenue model
- What to do next
This is a concept that feels somewhat wrong for an engineer like me. I am schooled to build things the right way in the beginning so that we only need to build it once.
But when speed is the prioritization this does no longer apply.
Do things that don’t scale and then throw away and iterate. Invest fewer resources in security, write code that doesn’t scale and wait for things to start breaking before you implement QA processes.
Raise too much money!
The only thing that is predictable in this world of uncertainty is that unforeseen events will occur.
It is then better to have the cash at hand than to have to scramble to find more funds when inevitably something happens that requires cash to solve.
To have more cash at hand outweighs the negative aspect of equity dilution. As Mariam Naficy, CEO of Minted said:
“[…] Both of us knows so many people who had good ideas and were on the right track, but just ran out of money.”
The money you raise tends to go toward to main factors: people cost and the cost of outbound customer acquisition. In Silicon Valley, it takes about six months to raise new capital.
That is why the rule of thumb is to raise enough cash for about 18–24 months. This period enables you to show enough progress to convince your future investors that they should invest in you in the next round.
The never-ending need for change should fill you with fear and hope
Fear that you never can stand still and rest. Hope, because new markets are always emerging and that everyone from Silicon Valley to Shanghai all has the ability to build something from nothing that is nothing less than a rocket ship.
Thank you for sticking it out until the end. If you enjoyed reading this be sure to follow me to receive my future articles!
A special thanks to Marcus Mazouch for proofreading.