Highlights on Blitzscaling by Reid Hoffman

Oleg Kalyta
Oct 17, 2018 · 12 min read

“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?” Glengarry Glen Ross

Author of one of my favorite podcast Masters of Scale, has recently published a book based on it. He is a co-founder of LinkedIn and he is the one who sold it to MS for $26.4B. The book got great feedback from Bill Gates, Eric Schmidt, and Brian Chesky.

I started reading it last weekend, and it’s amazing. With the simple words, you get the secret sauce that helps to scale Google, AirBnB, FB and Tencent and a many more similar things so fast! In addition to patterns, there are plenty of real growth stories of world-famous companies.

As a developer, I like to structure books while reading, to be able to get the required info within seconds. Below I hage the mindmap of the book and some of my favourite quotes and notes.

Mind map on Blitzscaling book

The mission of this book: to share the secret weapon that has allowed Silicon Valley to punch so much.

Why it’s important?

The window for action can be tiny and it can close quickly. Even a few months of hesitation can mean the difference between leading and chasing (author)

There is a rich ecosystem of service providers and outsourcing companies to support rapid growth. Many companies have gone through their own big growth spurts, so there are lots of examples to learn from. User feedback comes in a constant stream of data. Product cycles have dropped from yearly to weekly or daily. And good reviews can spread in an instant online, so a strong product can quickly attract a big audience.
Bill Gates

Blitzscaling — prioritizing speed over efficiency in the face of uncertainty. If you get it early and start getting feedback and your competitors don’t. then you are on the path to success.

Disruption on its own is neither good nor bad, but it always involves changes

The canonical sequence that companies like Google and Facebook have gone through begins with classic start-up growth while establishing product/market fit, then shifts into blitzscaling to achieve critical mass and/or market dominance ahead of the competition, then relaxes down to fastscaling as the business matures, and finally downshifts to classic scale-up growth when the company is an established industry leader.

…Facebook began as a classic blitzscaling story. The year-over-year revenue growth during its first few years of existence were 2,150 percent, 433 percent, and 219 percent, going from zero to $153 million in revenue in 2007.

Now compare your most optimistic scenario of getting the revenue or users number and plan when you may get these type of numbers. Let’s be fair with ourselves — we will never get FB numbers. But think what abyss is between it.

It also reminds me famous Peter Thiel’s quote:

If you have a 10-year plan of how to get [somewhere], you should ask: Why can’t you do this in 6 months?

How to Blitzscale?

1. Business Model Innovation

At Google, Larry Page and Sergey Brin built great search algorithms, but it was their innovations to the search engine business model — specifically, considering relevance and performance when displaying advertisements rather than simply renting space to the highest bidder — that drove their massive success.

Ideally, you design your business model innovation before you start your company.

Technology innovation is a key factor in retaining the gains produced by business model innovation.

As a tech guy, I always hoped tech will cover poor business model and sales. It didn’t worked. Another example about Netscape:

Netscape, whose Netscape Navigator mainstreamed Web browsing, and whose IPO kicked off the dot-com boom, was forced to sell itself off to AOL. Netscape engineers invented JavaScript, SSL, and all kinds of cool technology for the Internet that are still used today, but Netscape accepted the status quo when it came to using tried-and-true business models rather than developing new ones that were enabled by its own technology innovation. In the first “browser war,” Microsoft preinstalled its Internet Explorer on all new Windows computers, then gave away its Web server software, Internet Information Server (IIS), which effectively destroyed Netscape’s business model.

Growth factors

  1. Market size
  2. Distribution
  3. High gross margins

Designing a high-gross margin business model makes your chances of success greater and the rewards of success even greater.

Typically, you focus solely on the cost to you, and the perceived benefits of the purchase. This means that it’s not necessarily any easier to sell a low-margin product than a high-margin product. If possible then, a company should design a high-gross-margin business model.

Most of the valuable companies we’re focusing on in this book have gross margins of over 60, 70, or even 80 percent.

Can’t agree with this more. The more money you have, the more fuel and time you may spend till you might spend till you put out the fire. Sometimes, a good advice should be really simple and clear.
A great quote off Marc Andreessen comes to mind: Raise prices

4. Network effects

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.

Over two billion people now carry smartphones that keep them constantly connected to the global network of everything. At any time, those people can find almost any information in the world (Google), buy almost any product in the world (Amazon/Alibaba), or communicate with almost any other human in the world (Facebook/WhatsApp/Instagram/WeChat).

Growth limiters

“Product/market fit means being in a good market with a product that can satisfy that market.” Marc Adreessen

Lack of product/market fit

Frequently, you won’t be able to fully validate product/market fit before you commit to building a company. But you should try. entrepreneurs can and should do their research, and try to design their business model to maximize their chances of achieving product/market fit as quickly as possible.

Human limitations on operational scalability

Leading a small founding team with four members, you have to worry about your direct relationship with the three other cofounders, plus their direct relationships with one another. this means you need to manage the relationships between six pairs of individuals ([4*3] / 2). after you hire two employees, for a total team size of six, you need to manage the relationships between fifteen pairs ([6*5] / 2). You increased the team size by 50 percent, but the number of relationships you need to manage went up by 150 percent.

One approach is to design a business model that requires as few human beings as possible. Some software companies employ business models that allow them to achieve massive success with minimal numbers of employees. WhatsApp had a freemium business model; the service was free for a year, afterwhich it cost $1 per year. This low-friction model essentially eliminated the need for people working in functions like sales, marketing, and customer service, by the time of its acquisition by Facebook, a ratio of over ten million active users per employee!

Another approach is to find ways to outsource work to contractors or suppliers. “Do everything by hand until it’s too painful, then automate it” Brian Chesky

Infrastructure limitation on operational scalability

Friendster — 40 sec to load profile. Twitter’s Fail Whale. Tesla’s production rate. Nest had 130 employes when it was acquired by Google for $3B, largely because it had outsourced all of its manufacturing to China.

Proven patterns

  1. Bits rather than atoms

Bits-based businesses tend to be high-gross-margin businesses because they have fewer variable costs. Bits also make it easier to design around growth limiters. You can iterate more quickly on software products (many Internet companies release new software daily) than on physical products, making it faster and cheaperto achieve product/market fit.

2. Platforms

If a platform achieves scale and becomes the de facto standard for its industry, the network effects of compatibility and standards (combined with the ability to rapidly iterate and optimize the platform) create a significantand lasting competitive advantage that can be nearly unassailable.

iTunes — 30% revenue share. FB, iOS examples

3. Free or freemium
Examples: Dropbox’s 2GB free space, FB, LI

4. Marketplaces
Two-sided nerwork effect
Examples: Alibaba, Airbnb, AdWords

5. Subscriptions
Examples: Salesforce, AWS, Netflix

6. Digital goods
In 2014, its first year of operation, LINE’s sticker business generated $75 million in revenue. That figure grew to $270 million in 2015.

7. Feeds
Examples: FB, Twitter, Instagram. Monetization — ads.

Underlying principles

Moore’s law

“When we first started raising money in 1997, we thought we’d be mostly streaming in 5 years,” Hastings told us when he visited our Blitzscaling class at Stanford. “In 2002, we had no streaming. So we thought that by2007, it would be half our business. In 2007, we were still nowhere. So we made the same prediction. And this time we were wrong the other way — by 2012, streaming was 60% of our business”, founder of Netflix

Adaptation, not optimization

Companies practice continuous improvement, whether through an emphasis on speed or the constant experiments and A/B testing of growth hacking. This emphasis makes sense in an environment where companies need to seek product/market fit for new and rapidly changing products and markets. Consider how Amazon expanded into new markets like AWS rather than simply honing its retailcapabilities, or how Facebook has been able to adapt to the shift from a text-based social network accessed via desktop, Web browsers to an image- and video-based social network accessed via smartphones.

The contrarian principle

Google launched its search engine when most people thought search was a mature commodity. And Facebook built its social network when most people believed social networking to be either useless, a market dominatedby MySpace, or both.

2. Strategy Innovation

The only time that it makes sense to blitzscale is when you have determined that speed into the market is the critical strategy to achieve massive outcomes.

Many start-ups believe they are pursuing a strategy of extreme growth, when in fact they have the goal and the wish for extreme growth but no understanding of an actual strategy that will get them there.

Blitzscaling often requires spending significant amounts of capital in ways that traditional business wisdom would consider “wasteful,” implementing a financial strategy that supports this aggressive spending is a critical part of blitzscaling. For example, Uber often uses heavy subsidies on both sides of the marketplace when it launches in a new city, lowering fares to attract riders and boosting payments to attract drivers. Of course, that strategy isn’t possible without the ability to raise massive amounts of capital on favorable terms. In Uber’s case, it has been able to raise nearly $9 billion between its founding and the writing of this book.

Blitzscaling would have involved inefficiencies like paying construction crews to work twenty-four hours a day in order to get Disneyland open a few months earlier, orreducing ticket prices 90 percent to get to one million visitors faster — knowing that those one million visitors were networked to ten million more.

On learning curve:

Netflix has to solve DVD specific tasks, develop infrastructure and recommendation engine. Which now gives ability to predict popular content. Which allows to produce it.

On competition:

One of the reasons businesses tend to rely on blitzscaling is that speed is one of the primary advantages they hold vis-à-vis large companies. Start-ups can act quickly to capitalize on the new opportunities created by technological advances. If they dawdle and proceed at the same pace as a big company, they’re fighting on an even playing field, which means that the big company’s resources will likely confer massive advantage.

“All bold strategies have a risk. If you don’t see it, you’re flying risk-blind.” Jerry Yang

3. Management Innovation

Reinventing your leadership style, your product, and your organization at every new phase of scale won’t be easy, but it is necessary. In the words of leadership guru Marshall Goldsmith, “What got you here won’t get you there.”

You’re also adding qualitatively different kinds of people to the team, the marines take the beach, the army takes the country, and the police govern the country. Marines are start-up people who are used to dealing with chaos and improvising solutions on the spot. Army soldiers are scale-uppeople, who know how to rapidly seize and secure territory once your forces make it off the beach. And police officers are stability people, whose job is to sustain rather than disrupt. The marines and the army can usuallywork together, and the army and the police can usually work together, but the marines and the police rarely work well together. As you blitzscale, you may need to find new beaches for your marines to take rather than askthem to help patrol the existing ones.

“It takes years and years to grow candidates from within,” she told our Blitzscaling class at Stanford. “We take disciplines where we aren’t strong, like finance and HR, and hire in experts from the outside. When it comes to our secret sauce, like crowdsourcing, we grow people from the inside. Our VP Art and Stationery grew internally, while our VP Finance and Chief People Officer are outside hires.” Mariam Naticy

John’s Lilly (Founder of Mozilla) three-step process to hire.

  • Hire someone who is already a known quantity to at least one member of the team.
  • Bring the new executive in at a lower level initially and let the executive prove himself or herself.
  • Once the executive has earned the team’s trust and credibility, consider promoting him or her.

Nota bene

High-class problems are still problems; it may feel better for your ego to be wrestling with the issues of growth rather than simply trying to avoid missing payroll, but both can still kill your company

Luck always plays a larger role than founders, investors, and the media would like to admit.

The key is to combine new technologies with effective distribution to potential customers, a scalable and high-margin revenue model, and an approach that allows you to serve those customers given your probable resource constraints.

But life isn’t always so neat.

The greater risk for a successful, growing business is to move too slowly and allow its competitors to win market leadership and first-scaler advantage.

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 isbroken. — Drew Houston

I like to generate fresh, innovative ways to play defense by asking my team, “If we were trying to compete with ourselves, what we would do? What if we were a start-up? Google? Facebook? Microsoft?”

A lot of great founders are product people. Initial product/market fit and success are achieved because of their product instincts. But as the company grows, these founders will almost always need to hire an executive to takeover leadership of the product organization — it’s too important to be a founder’s part-time job.

If you truly want to blitzscale, then speed has to take priority over everything — including your own ego. There are only three ways to scale yourself: delegation, amplification, and just plain making yourself better.

P.S. If you like quotes below, buy the original book. It’s one of the most valuable I have ever read.

🚀 My team helps startups founders to bring their ideas to life. If you also may need some help, send a message️ oleg@productcrafters.io

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Oleg Kalyta

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Help to create startups, founder @ http://ProductCrafters.io

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