Blitzscaling, Snailscaling or Mindful Scaling?
When I was a young girl and dabbling in the art and science of knitting, my grandmother instilled in me the value of “measure twice, cut once”.
She was an old lady, tormented by fears of wasting yarn by the memory communist-era shortages, but the rule made sense to me. Thrift and efficiency were big themes while I was growing up.
As I unwittingly carry the mental models of my childhood with me, I’m struck by how antiquated my grandmother’s wisdom is for doing business today.
Today’s aspiring businesses seem to work in more of a “cut — measure — cut — measure — cut — measure … “ cycle.
And that’s understandable. Now, when a new market is established, the major risk isn’t not doing things right, it’s missing out completely. Often, a few months differentiate the company that becomes the leader from the company that, by definition, becomes the chaser.
There’s even a name to this new race pace: Blitzscaling.
And all the hip unicorns are doing it.
What is Blitzscaling?
LinkedIn co-founder and host of the popular Masters of Scale podcast, Reid Hoffman, coined the term in his new book: “Blitzscaling — The Lightning Fast Path To Building Massively Valuable Companies”
Hoffman once used to joke that starting a company was like jumping off a cliff and assembling a plane on the way down. He now adapts that analogy to describe Blitzscaling as: “jumping off a cliff, assembling that plane faster, then strapping on and igniting a set of jet engines while still building the wings”.
Sounds terribly exciting but also like something you should get comprehensive life insurance for.
How does one Blitzscale?
Blitzscaling means being fluent in the language of scale: equity/VC finance for fuel, cloud computing, and viral marketing need to become your best friends.
The quest for the next hockey stick growth curve starts way before you pick a logo. You need to choose a business and sector that will allow this jump to hyperspeed. Blitzscaling’s 4 growth factors are the main variables you need to look at when picking a product or service. They are: Market Size, Growth Size, High Distribution Margin, and Network Effects.
By far the most important factor is the market size.
You can’t be chasing peanuts if you want to Blitz. You’ll also want to be in a business with significant network effects, where every additional user adds to the value of the network for every other additional user. Think - a telephone company or better yet — Facebook.
It also looks like Blitzscaling supports innovations that seem to only be going into one direction: efficiency innovations. Taking things people already do, and doing them better, faster, cheaper.
People want immense choice and fast delivery: cue Amazon.
People want cheap hotels: cue Airbnb.
People want low-cost cabs: cue Uber.
Market-creating innovations, such as airplanes or the telegraph once were, might not fit the mold. Where’s the market size, where are the network effects, where’s the distribution margin?
What can go wrong?
In light of the seemingly narrow pool of companies that can effectively use its magic, Blitzscaling looks like a one-size-fits-some solution.
And though fast growth and land grabbing on a scale that fits the WW2 reference are often the necessary tactics to winning big in new markets, adding the blitz-prefix to your scaling efforts can also break your company.
In a post for Version 1’s blog, a VC fund with investments in Indiegogo, Coinbase and AngelList, founding partner Boris Wertz shares his insights from looking at the exits of a cohort of 20 early stage start-ups.
“There were ten exits out of a total of 20 investments. These were all “early exits” with mostly unsatisfactory outcomes for everybody involved. (…)
We wanted a better understanding as to why these outcomes didn’t turn out as well as we had hoped. These were all good companies… good ideas, good founders, good teams. So, what happened?
After analyzing the early exits, we realized we could put them into two buckets: the ones that never got product-market fit and the ones that raised too much money and scaled prematurely.”
Boris Wertz
Not getting to product market fit is not a shocking outcome for an early stage start-up, but raising too much money does sound like a nice problem to have. Sweet as it may sound, for many a company, it has been the kiss of death.
Raising considerable funding means that companies need to show results, fast. They subsequently often ramp up the sales organization without a complete understanding of either the market or how to sell to them.
A larger sales organization is then mirrored in operations and development, more staff is hired. The burn rate increases and pressure to show why all this spending is worth it mounts. Then, when you reach the famed number of 25 employees, if you haven’t figured out the culture yet, you’ve got another demon to wrestle.
For a company falling into the over-zealous growth trap, the results they’ve pitched to investors go from exponential to linear to flat very fast.
Add to that: bad product execution or customer service that sucks can be a death sentence, especially for a “nice to have” rather than a necessity (and let’s be honest, this applies to most new products). Also, if you’re not a pure software product, a fix isn’t that instant either. By the 3rd iteration of your IoT thermostat, and after the 23 scathing reviews it got on Trustpilot, you might not get to iterate again. Consumers’ attention spans have dropped and so has their patience. We’ve had perfectly functioning everything for a long time, so “moving fast and breaking things” will only take you as far as your customers’ tolerance.
What is Mindful Scaling?
There might be a middle way. Let’s call it Mindful Scaling.
Mindful scaling will have you raising money — if you need it.
The goal is creating a sustainably profitable business, not just a valuable one. If your company is ten years old, valued at 120 Billion and people still aren’t sure if and when you’ll ever turn a profit, that’s Blitzscaling. If you’ve set your eyes on profitability from the start, but are not afraid of using all the financial tools in your arsenal to put fuel on the fire, that’s mindful scaling. Mindful scaling emphasizes creating customer value over company valuation.
Experimentation is still key, but so is thoughtfully developing hypotheses and respecting customers. The balance is about bringing carefully developed products to more and more people who need them, at the speed that the process will allow.
If you’re a networked software company with a two-sided market where there are positive network externalities associated with each additional user, then yes, Blitzscaling is probably made for you. For the rest, a mixed approach with a sensible reliance on both experimentation and thoughtful creation of hypotheses is probably the way to go.
And if you need a little bit of help on the way to the top, chat to us at Fundsquire — we might be able to help with innovative R&D financing.
Originally published at https://fundsquire.co.uk on April 26, 2019.
