Summary: Blitzscaling by Reid Hoffman
Summary: Blitzscaling by Reid Hoffman

Summary: Blitzscaling by Reid Hoffman

Why Speed is 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.

There’s 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’s lots of examples to learn from.

User feedback comes in a constant stream of data. Product cycles have dropped from yearly to weekly and daily. And good reviews can spread in an instant online, so a strong product can quickly attract a big audience.

Speed Over Efficiency

Blitzscaling prioritize speed over efficiency in the face of uncertainty. If you get it early and start getting feedback and your competitors don’t’, then you’re on the path to success. Google, Facebook, AirBNB, Uber all have done it.

They’ve gone through classic startup-growth while establishing product/market fit, then shifts into blitzscaling to achieve critical mass and market dominance ahead of the competition. Then they relax down to fast scaling as the business matures. Finally they downshift to classic scale-up growth when the company is an established industry leader.


How to Blitzscale?

Innovate Business Model

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 ads 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.

No tech is a substitute for poor business model.

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 pre installed its Internet Explorer on all new Windows computers then gave away its Web server software, IIS, which effectively destroyed Netscape business model.


Growth Factors

Market size

If you want to build a massive company, begin with the basics and eliminate ideas that serve too small of a market. And remember a small percentage of a huge market is big.


Distribution techniques fall into two general categories: leveraging existing networks and virality.

New companies rarely have the reach or resources to simply pour money into advertising campaigns. Instead, they have to find creative ways to tap into existing networks to distribute their products. For example, PayPal tapped into eBay user base by building software that made it extremely easy for eBay sellers to automatically add a “Pay with PayPal” button to all of their listings.

Virality occurs when the users of a product bring more users, and those users bring additional users, and so on. For example, LinkedIn built software that allowed their users to connect to Outlook contacts, which made it very easy for them to invite their most important connections. Paypal combined organic and incentivized virality. But equally important was an unanticipated source of virality.

High gross margins

Designing a high-gross margin business model makes your chance 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 one. If possible, a company should design a high-gross-margin business model.

The more money you have, the more fuel and time to put out the fire. Sometimes, good advice is raise prices.

All other things being equal, investors almost always place a much higher value on companies with higher potential gross margins than companies that have already maximized their realized gross margins.

Network effects

Network effects is when increased usage by any user increases the value of the product or service for other users.

Over 2 billion people carry smartphones that keep them constantly connected to the global network of everything. At any time, those people can find almost anything (Google), buy almost anything (Amazon/Alibaba) or communicate with almost anyone (Facebook/WhatsApp/Instagram/WeChat).


Growth Limiters

Lack of product/market fit

No business plan survives first contact with customers.

Most often, 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 4 members, you have to worry about your direct relationship with 3 other co founders, plus their direct relationship with one another, this means you need to manage the relationships between 6 pairs of individuals.

After you hire 2 employees, a total team of now 6, you must manage relationships between 15 pairs. You increased the team size by 50%, but the number of relationships you need to manage went up by 150%.

One approach is to design a business model that requires as few humans begins as possible. Some software companies employ business models that allow them to achieve massive success with minimal number of employees. WhatsApp had a freemium business model; the service was free for a year, after which it cost $1 per year. This low-friction model essentially eliminated the need for people working in sales, marketing, customer service. By the time of its acquisition by Facebook, they had a ratio of over 10 million active users per employee!

Another approach is to outsource work to contractors or suppliers. Doing everything by hand until it’s too painful, then automate it.

Infrastructure limitation on operational scalability

Friendster (the first social network) massive growth brought massive headaches, especially on the infrastructure side. Despite a talented tech team, Friendster’s servers couldn’t handle the growth, and it became common for Friendster profiles to take up to 40 seconds to load. In early 2005, MySpace was generating 10 times the number of pageviews as Friendster, which never recovered.

Twitter came close to melting down in the same way, but managed to recover in time to build a massive business. When Twitter began its rise in the late 2000s, it became famous for its “Fail Whale”, a whimsical  error message that appears whenever its servers couldn’t handle the load. Unfortunately for Twitter, Fail Whale made regular appearances. Twitter invested serious resources into rearchitecturing both its systems and its engineering processes to be more efficient. Even with this strenuous effort, it took several years to tame the Fail Whale.

Tesla motors has seen its growth held back by infrastructure limitations. Due to complexities of its manufacturing process, Tesla’s production rates have lagged behind those of other automakers, the result being that it award-winning vehicles are almost always sold out, with backorders line up in months and even years.

Demand generation is not a problem for Tesla; meeting that demand is.


Blitzscaling Proven Patterns

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 physical products, making it faster and cheaper to achieve product/market fit.

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 significant and lasting competitive advantage that can be nearly unassailable.

Free for Freemium: Dropbox’s 2GB Free space, Facebook, LinkedIn

Marketplaces: Two-sided network effects like Alibaba, Grab, Airbnb, AdWords

Subscriptions: Salesforce, AWS, Netflix

Digital Add-ons: In 2014, its first year of operation, LINE’s sticker business generated $75m in revenue. That figure grew to $270m in 2015.

Feeds: Facebook, Twitter, Instagram, Monetization – ads.


Blitzscaling Underlying Principles

Moore’s Law:  When Netflix started raising money in 1997, they thought they’d be mostly streaming in 5 years. 5 years later in 2002, they had no streaming, so they thought that by 2007, it would be half their business. In 2007, they were still nowhere. So, they made the same prediction. And this time they were wrong the other way. By 2012, streaming was 60% of their business.

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 when they 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 retail capabilities, or how Facebook has been able to adopt the shift from text-based social network via Desktop computers to an image-video-based via smartphones.

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 dominated by Myspace.

Strategy Innovation: The only time it makes sense to blitzscale is when you’ve determined that speed into the market is the critical strategy to achieve massive outcomes.


Blitzscaling Require Extreme Resources

Blitzscaling often requires spending significant amounts of capital in ways traditional business wisdom consider ‘wasteful’. Implementing a financial strategy that supports this aggressive spending is 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 $9b.

It also would have involved inefficacies like paying construction crews to work 24 hours a day to get Disneyland open a few months earlier or reducing ticket prices 90% to get to 1m visitors faster – knowing that those 1m visitors were networked to 10m more.


Management Innovation

What got you here won’t get you there.

Reinventing your leadership style, product, organization at every new phase of scale won’t be easy, but it’s necessary.

Marines take the Beach: Marines are start-up people who’re used to dealing with chaos and improvising solutions on the spot.

Armies take the Country: Army soldiers are scale-up people who know how to rapidly seize and secure territory you’re your forces make it off the beach.

Police govern the Country: Police officers are stability people, whose job is to sustain rather than disrupt.

Marines and army can usually work well together. Army and police can usually work well together. But marines and police rarely work well together. As you blitzscale, you may need to find new beaches for your marines to take rather than ask them to patrol the existing ones.

Lots of great founders are product people but as the companies grow, there’s almost always a need to hire executive who can look outward and ahead. It’s too important to be a founder’s part-time job. You have to be equally good at getting users. You’ve to be good at building a product, and you have to be just as good at getting users, and you’ve to be just as good at building a business model.

It takes years to grow quality candidates. Hire someone who’s already a known quantity to at least one member of the team. Bring new executive in at a lower level initially and let him prove himself. Once the executive has earned the team’s trust and credibility, consider promoting him.

Remember if you truly want to blitzscale, ‘speed’ has to take priority over everything, including your own ego.