We’re in an interesting period of capitalism, which to my surprise firms capture relatively miniscule amount of value it creates. Technological change is happening at breakneck speeds which are leaving people scared, uneasy and shocked. One of the very reasons I love innovation and disruption is this:
People should be part of building the future, rather than feeling like the future is being forced upon them.
What is Blitzscaling?
Blitzscaling is a good book to get acquainted with many of the touted adage about start-ups and scale-ups in contemporary Silicon Valley. The authors try to market their own lingo around it. Many of these examples are conventional wisdom, and heavy in survivor and hindsight bias. Blitzscaling has the benefits of blindside current incumbants, build long-term competitive advantages, building capital as a market leader, setting the pace in a market while squeezing out laggards including in the competition for talent. Despite its upsides, blitzscaling is also rife with risks - breaking your strategy, products, systems, ways of working, brand, financials, and bankruptcy.
Blitzscaling is defined as “prioritizing speed over efficiency - even in the face of uncertainty.” Organizations wants to do this to achieve “first-scaler advantage” - that is, the first company to monopolize a market. This is especially important for business models that require network effects. This means that investors are funding growth before the revenue model is proven. In contrast, start-ups without product market fit will prioritize minimizing uncertainty, while maximizing efficiency. The LEAN methodology is all about being resourceful. As a start-up reaches a phase of maturity where is more certain about its future, it can grow using classic management techniques such as hurdle rates which seeks consistent ROI. Fastscaling occurs when a company sacrifices short-term efficiency for growth in order to gain market share or increase revenue, where there is sufficient certainty about its future. If start-ups are going from “zero to one”, scale-ups that blitzscale are going from “one to one billion”, both within a short period. The tech titans of this current era go through multiple S-curves, where as prior titans were more complacent once they became incumbant. Blitzscaling is as important for mature companies, this means you might have to abandon what is currently working. Nokia is used as an example of the “cost of caution”. Blitzfailing may occur when product/market fit isn’t there, the business model doesn’t work yet, or market conditions aren’t right for hypergrowth
Analogies for Headcount
- Family, < 10 people
- Tribe, 10+
- Village, 100+
- City, 1000+
- Nation, 10000+
Which begs to question, what is Walmart and McDonalds? According to wikipedia, they employ ~2 milllion folks!
Business Model Innovation
However, technology is not a sole differentiator. Most companies combine and enhance existing products (e.g. Tesla) vs pioneer completey new ones (e.g. SpaceX). Many of the technology-leaders are really technology-enabled, rather technology-only. Technology still plays a vital role as they are the keys to future growth.
Growth Factors
- Market Size - Is the market growing? What is the total available market? How might you expand to adjacent markets?
- Distribution - How do you acquire users in each channel? Can you leverage existing networks (e.g. PayPal/eBay, Airbnb/Craigslist, Zynga/Facebook)? Can you leverage your users to refer others (virality)?)?)?)?
- High gross margins - what is the cost of duplicating your product? Economies of scale big role here, where copies of your product should be able to obtain cheaply. This is inherent in software and digital-only companies, as bits are cheaper than atoms. However, even for some software companies, you’ll need to hire humans to sell, support, and manage your operations. The authors point out that one of the ways to maximize market share is by sacrificing potential gross margins, by artificially pricing your services lower than they could be.
- Network effects - Each additional user increases the value of the platform. We have five types - direct, indirect, two-sided, local, and compatible/standards. Respectively, examples include: social media and messaging apps, operating systems, marketplaces, unlimited “favourite” callers, family of products.
Limiting Factors
- Product Market Fit - as Alicia Keys would put it, “everything means nothing - if I ain’t got you”
- Operational Scalability - humans and infrastructure. Stay lean like WhatsApp, and try to avoid Twitter’s Fail Whale. Luckily, we’re in the age of Cloud computing.
Proven Patterns
- Bits rather than atoms - software is cheap to duplicate, where as humans and manufacturing is not
- Platforms
- Free/freemium
- Marketplaces
- Subscriptions - lower overhead for B2B and B2C alike, and predictable revenue streams
- Digital Goods - stickers and micropayments; in-app purchases
- Feeds
Underlying Principles of Business Model Innovation
- Moore’s Law - Netflix’s Reed Hastings had to wait patiently but streaming technology eventually caught up for him to execute on his vision. Before that, DVDs were compact and durable which allowed it to ship them around cost effectively. Along the way, key relationships with studios were built up.
- Automation - computers increasily perform better than humans at more and more tasks
- Adaption, not optimization - companies are require to adopt to new mediums of success. Examples include Amazon’s AWS vs retail business, or Facebook’s shift to mobile.
- The Contrarian Principle - obvious opportunities attract competition, where as being a contrarian buys time to refine your business model into a well-oiled machine
Case Studies
- LinkedIn - Market size for a professional online identity overlaps with anyone who has a resume. Distribution relied relied on users to invite and import their contacts. Gross margins are high as LinkedIn sells both consumer and enterprise subscriptions. LinkedIn leverages both direct and two-sided network effects with talent and employers. LinkedIn originally sold their enterprise product by pitching it to potential customers. Once that reached a certain scale, they scaled their operations by automating and investing on an internal tool called “Merlin” that analyze user behaviour on the platform, surface potential customers to convert, and even create personalized sales decks.
- Amazon - “The Everything Store” sells books (atoms) to web services (bits) and everything in between. Amazon shares a portion of their revenue through affiliate linking, which gives incentives for anyone on the internet to distribute its services. Though AWS is massively profitable, Amazon is slowly shifting their retail business as well. Amazon’s role as a distributor that buys and sells products ties up their capital, where as Amazon’s third party sellers ties up their third party seller’s capital instead. Amazon’s retail business relies on the flywheel. AWS on the other hand, leverages both indirect network effects and standards. Amazon has invested heavily in some of their people, as well as their infrastructure. AWS was spun out as a result. Their fulfillment centers, Prime Now hubs, and sortation centers allow them to optimize costs, and delivery time.
- Google - AdWords is relevance-based, revenue-maximizing, and a self-service system. Interesting enough, pay-per-click was developed by Goto/Overture. This generated more revenue per search. As the internet grew, so did the content hosted within it, which made relevant search results increasingly difficult. These two factors allowed Google to dominate in the future decades. Its innovation stack has only grown more profitable upon acquisitions of Android, Maps, and YouTube. Google’s partnership with AOL, Firefox allowed it to distribute its services as the default search provider. Google has a strong moat when it comes to network effects - Waze benefits from more users through reporting traffic live. Android empowers developers to build mobile apps while taxing and distributing on the Play Store. YouTube is two-sided with video creators and audiences. G-Suite leverages the power of compatability, which drives its adoption. Google invests heavily in its people and culture as well as technology.
- Facebook - The job to be done is to stay connected with friends, which is universal. Facebook started off in college campuses so that local network effects were strong before opening it up more broadly. Similar to Google, Facebook makes ads off of advertising. Mindblowingly enough, where Google’s margins are around 61%, Facebook’s is around 87%. One important pivot for Facebook was from desktop to mobile. Acquisitions such as Instagram and WhatsApp were strategically sound. Intermixing advertisements and content increased the likelihood for people to click on ads. Arguably, Facebook’s greatest innovation is training humans to engage with its products constantly with likes, comments, shares. As Facebook scaled, it shifted from “Move fast and break things…” to the addition of “…with stable infrastructure”.
Strategy Innovation
When to Blitzscale
- A Big New Opportunity - YouTube was very capital-intensive, but it launched at the right time. Networks could finally stream video, and cell phones had video capability. Low gross margins means that market size should be large. Alibaba launched before e-commerce was a given, and supporting delivery and payments services were non-existent. However, with a growing middle class in China, the market opportunity was huge.
- First Scaler Advantage - Achieving market dominance to confer lasting competitive advantage - either economies of scale or network effects. Interestingly enough, the authors here note that food delivery is a pure commodity business and unlikely to justify blitzscaling. Though, this is probably because it was written before UberEats started building out their ads business, as well as Amazon.
- Learning Curve - Climb the steep learning curve early. Netflix learnt to negotiate with studios access to movie DVDs and recommendation systems before it pivoted to streaming. The data collection also helped them inform their in-house studios’ original content as traditional studios tried to renegotiate their terms.
- Competition - Rocket Internet has a history of create European-copies of US companies. They were able to sell DailyDeal to Groupon for a stake in their company. Similarly, they tried the same trick with their Airbnb clone, Wimdu. Brian Chesky decided to out-compete with them rather than to give in to their predatory practices.
- Good Times, Bad Times - Blitzscaling is more obvious in good market conditions, but can happen during bad times as well. The key is to measure its relative growth to the total market. If you grow at 100% YoY while others are growing 200% YoY, then you’re losing. Conversely, if you’re growing 50% YoY while the rest are growing at 5%, you’re dominating.
- Going Faster - ClassPass threw out their hiring processes in order to hire faster. They leveraged their professional networks, and relied on known companies. They used the time to focus on alignment on the company’s mission rather than testing for skills. The authors mention how they chose not to blitzscale because their competitors Plaxos didn’t understand social networks.
When to Stop Blitzscaling
No market is infinite. Some signs of releasing the afterburners include: declining growth rates, worsening unit economics, decreased per-employee productivity, or incrasing management overhead. Groupon cornered the daily deals market, yet did not lead to sustained business for its merchants, nor itself. Twitter’s user and revenue growth has hit its ceiling, and started shrinking its number of employees.
Choosing to not Blitzscale
Not all businesses are meant to Blitzscale. French Laundry isn’t in the same market as McDonald’s. Most SMBs and lifestyle businesses fall into this bucket as well. An interesting note here is that even if you’re not directly competing with a company as a business, you are likely indirectly competing with them for office space and talent.
Blitzscaling is iterative
Paul Graham originally wrote about Do Things That Don’t Scale, but blitzscaling extends upon these ideas with:
- Do things that don’t scale.
- Reach the next stage of blitzscaling.
- Do one set of things that scale. Do another set of things that don’t scale.
- Reach the next stage of blitzscaling.
- Repeat.
How blitzscaling changes at each stage
At the family/tribe stage, blitzscaling is only possible if: (a) you’re the only competent player in this space (rare), (b) first to figure out a brilliant growth strategy, and (c) you can out-execute your competitors - raise better, hire better, build better.
At the village/city stage, blitzscaling is usually in pursuit of of a diffrentiated strategy. Airbnb’s European expansion is used as an example of rapid parallel market development. That is, it chose to simultaneously expand cities across Europe (and the globe) all at once, instead of sequentially.
At the nation stage, companies need to find emerging markets to blitzscale into. Apple and Google’s dominance of smartphones is used as an example. Apple is often cited throughout this book as a company that has continuously reinvented themselves, and their products in the past decades.
Role of Founders at each stage
- Family - the founder does everything
- Tribe - the founder manages people
- Village - the founder designs an organization
- City - the founder makes high-level decisions about goals and strategies
- Nation - the founder decides when to stop blitzscaling, and figures outs new product lines to blitzscale
[This summarizes about half of the book. Will pick this up again later.]