The race to bigness

Author: 
Paul Nolan

In  their new book “Blitzscaling,” Angel investor Chris Yeh and LinkedIn co-founder Reid Hoffman say the first-mover advantage is a myth. It’s all about being first to scale.

SMM: Define blitscaling.

Yeh: We define it as the pursuit of rapid growth by sacrificing efficiency for the sake of speed in an environment of uncertainty. The reason it’s important is that it goes against the entire history of business, which is really focused on efficiency. In the modern era, where we’re all connected by a global network, speed is actually the most important competitive factor.

SMM: But is rapid growth right for every business?

Yeh: No. Some businesses do perfectly well staying at a reasonable size. The French Laundry [a Napa Valley three-Michelin-starred restaurant] and Amazon were founded in the same year. Both are great businesses, but The French Laundry is not interested in rapid growth. It’s not interested in growth at all. It’s interested in doing something amazing and doing it consistently. The fact that it’s very different from Amazon doesn’t mean that it’s not a good business.

SMM: You also say that blitzscaling is about more than just growth.

Yeh: Growth is the goal of blitzscaling. Blitzscaling itself is a set of approaches, techniques and tools that allow you to grow quickly and also manage the strain of growth, because while growing quickly is generally a good thing, it brings a whole set of challenges.

SMM: That conjures up a quote in your book from Dropbox founder Drew Houston who said of his accelerated growth, “It’s like harpooning a whale. The good news is you’ve harpooned a whale. And the bad news is you’ve harpooned a whale!” If you’re going blitzscale, you’ve got to be ready for the consequences.

Yeh: In the tech world and elsewhere, you can see companies that grow at triple digits every year for a sustained period of time. Most of the business practices that you read about in BusinessWeek or in Harvard Business School case studies are focused on companies undergoing regular growth – 20 percent or 25 percent growth if they’re really growing quickly. You have practices that are designed around that rate of growth, but those practices break down when confronted with a company that is doubling or tripling every year. Just think about hiring practices. Normally, you rely on the new people to come in and learn from the existing employees. In the case of a blitzscaling company that is tripling in size, by the end of the year, two-thirds of the company is new people. It’s critical to understand that, because the environment is so different, you have to do the opposite of many traditional business practices.

SMM: Is blitzscaling tailored to startups? What about established companies?

Yeh: A giant Fortune 500 company may grow 5 or 10 percent per year. That seems to be very stable and people might say, “What is the point of blitzscaling for a company like that?” If you look deeper, that company actually has a variety of business units and initiatives, some of which are declining and some of which are growing rapidly. If you look at the individual pieces, then you see that blitzscaling absolutely applies to those growth initiatives within larger companies.

A great example of this is General Motors. GM is in the news right now because, despite earning profits, the company is shutting down production lines and laying off 14,000 people. People say, “How is this possible? General Motors is doing well. It’s making profits. Why is it laying people off?” The answer is it’s not a monolith. I guarantee you that the lines of business where it is laying people off – the manufacturing of sedans in the United States – is a money-losing business and a declining business. They are being decisive and saying, “We need to invest in our growth business – in our self-driving cars and automated vehicles, which, by the way, has grown in value from $1 billion when they acquired [start-up Cruise Automation in 2016] to an estimated $15 billion today. If GM is going to be the leader in automated vehicles, then it needs all of the financial resources it can get to blitzscale that business.

SMM: Is there a company in the self-driving car arena that you feel is blitzscaling most effectively right now?

Yeh: The company that has done the best in this area so far, just because of its overall aggressiveness, is Waymo, which is Google’s self-driving car effort. It’s a difficult technology, and Google has, by far, the most miles driven and the most experience with the product on the road. That gives them a significant advantage over their competitors. The other advantage they have is Google’s financial, which might means they can invest more aggressively in that business than just about anyone else.

SMM: Many of the examples in your book are tech companies, but you emphasize that blitzscaling can work in any industry.

Yeh: Absolutely. The circumstances have to be right. You have to remember two things: First, It’s all about speed. So the question is, is speed relevant to your industry? I would argue that for most industries, the answer is yes or it’s going to become yes, because most industries are either being disrupted or will be disrupted by new entrants. The second thing is that blitzscaling is relative. In the high-tech, start-up world, where high growth is fairly common, a company might need to be tripling in size each year to be considered to be blitzscaling. The goal of blitzscaling is to run a race and beat your competitors. In a different industry, it might be that 40 percent growth represents blitzscaling because, at that rate, you’re opening up a lead over your competitors. I was speaking with a CEO from a forklift company that is aggressively moving into augmented reality as one of their major initiatives. Being industrial doesn’t mean that you don’t have tech and it also doesn’t mean that you can’t blitzscale.

One thing I’ll add is that many people say the examples used in the book are consumer oriented as opposed to B2B examples. That’s true, but primarily because the reading public is far more aware of consumer businesses than they are B2B businesses. It is absolutely possible on the B2B side as well. Things may look a little different. When we talk about distribution on the consumer side, we talk about things like viral marketing, word of mouth and public relations. When we go over to the B2B world, we may be talking about developing a channel and building a freemium product that allows you to generate leads. It’s a different set of techniques, but the goal is the same: be the first to scale and build enduring market leadership.

SMM: So a key component is that your industry is experiencing disruption. If things are being done the same way they were 15 years ago, you’re probably not going to be blitzscaling.

Yeh: That’s correct. The point of blitzscaling is that, for whatever reason, a market has opened up. It might be a new market that is enabled by technology. It might be an existing market that has been disrupted by a change in regulation. But for whatever reason, the playing board has been scrambled and it’s up for grabs. That’s when you blitzscale, because you want to be the person that wins the race to being the market leader.

SMM: You’ve explained that blitzscaling can happen within teams rather than an entire company. So could a middle manager initiate a blitzscaling effort within his or her own team?

Yeh: Absolutely. Blitzscaling can happen at a very small scale as well as a global scale. A manager could drive blitzscaling on their own team. That would allow them to grow faster than the rest of the company, which, hopefully, would bring benefits to the manager and to the company as whole. One example that is prominent here is Amazon Web Services. That division is a little over a decade old, yet it probably accounts for two-thirds of Amazon’s market value.

SMM: In any situation, however, you need sufficient funding to carry blitzscaling off, right?

Yeh: You do need money in order to blitzscale, but there are different ways to get that money. The common way in the start-up world is to raise money from venture capital. In an established company, you may be trying to get increased allocation from a board or from a CEO. There are also ways to blitzscale without bringing in money. It might be possible to blitzscale with increased revenue. There are also nonprofits that blitzscale by finding clever ways to reduce the capital requirements by partnering or by working with others. Dress for Success, a nonprofit that helps underprivileged women with donations of professional clothing to help them on their career ladder, didn’t have any money, but partnered with women’s shelters and said, “If you provide staffing for our stores, you can refer your clients to us and we’ll help them.” That was a way of doing both the marketing to find the customers, as well as getting someone else to pick up the tab for operations – staffing the stores.

SMM: Amazon is sited frequently in the book as an example of a company that scaled quickly. However, in “The Space Barons,” Christian Davenport’s book about private investment from the likes of Jeff Bezos and Elon Musk into the restoration of the American space program, Davenport emphasizes that Bezos is methodic almost to a fault with his company Blue Origin. Here’s a guy who has had epic success with blitzscaling, yet realizes when it may not be a proper strategy for a different endeavor.

Yeh: Jeff Bezos is one of the smartest and most successful people in the world. He has applied very different techniques to very different elements of his life and business. Amazon is the exemplar of blitzscaling, but through Bezos Expeditions [which funds Bezos’ personal venture capital projects] he invests in [web application company] Basecamp, whose founders explicitly reject the notion of growth and focus on work-life balance. So he’s definitely not a one-trick pony. He’s willing to do different things in different areas.

You also don’t want to prematurely blitzscale. In this case, it’s not clear that surging out in front is going to allow you to capture that market and then dominate for the long term. I don’t know if there are network effects that cause you to have a dominant position in space flight. It seems like there are a lot of different places you can take off from, and there is no shortage of people who are willing to send things into space. If I’m a telecommunications company that wants to send something into space, the fact that there is SpaceX and other agencies that will send it into space is a good thing. I don’t think to myself, “I want to work only with SpaceX because that gives me some sort of benefit.”

SMM: You describe the blitzscaling environment as “do or die, with either success or death occurring in a remarkably short time.” Is there a danger of killing a project or company to quickly because of the blitzscaling model? Some projects may just need time to incubate before succeeding.

Yeh: Absolutely. Blitzscaling is no more infallible than any other strategy. Its main purpose is to allow you to move faster than the competition. If you misread a market and you realize later that either speed wasn’t important, or that you grew into the wrong market, then blitzscaling will not help you. A company like Groupon grew extremely rapidly, was seizing a particular market, but failed to realize that the market was probably not a good one. It’s niche market as opposed to a giant market, so spending money to grow to an enormous size didn’t really help much.

SMM: Facebook is another obvious example of a company that scaled fast. Mark Zuckerberg had his notorious credo, “Move fast and break things,” which it has since abandoned. Are the troubles that Facebook has encountered in the past year or two regarding privacy issues and fake news an example of the risk of moving too quickly without applying careful thought.

Yeh: When you are making decisions quickly, you also have to have the humility that you may make the wrong decisions. You have to be on your guard for the warning signs that indicate that you may have made a mistake and be prepared to change quickly. Blitzscaling is not just about rapid growth in one direction. It’s also about being able to change direction quickly. During the first year of its existent, PayPal actually had four different business models. It was trying to figure out what to do while still smashing the pedal to the metal trying to grow as quickly as possible.

When it comes to Facebook, the core criticism I would have, and this is a classic criticism, is that in focusing on the business results – the core metrics of success – the company neglected to ask all of the questions it should have about the sources of that growth. Their focus was solely on growing customer engagement and not pausing to see that people were outraged or spreading fake news. The company is going to have to take greater responsibility for the consequences of its decisions in the future.

SMM: One of the three basics of blitzscaling is be the first to scale. What are the advantages of that?

Yeh: Oftentimes, people talk about a first-mover advantage, but that’s actually erroneous. There are plenty of later movers who are successful. Apple was not the first company to build a smartphone. Google was not the first company to build a search engine. Facebook was not the first company to build a social network. What really matters is being the first to scale. When you are the first to scale in a business that’s a winner-take-most or winner-take-all market, that’s how you build enduring market leadership. Instead of being focused on the first out of the gate, the focus has to be, “what is the critical scale that’s going to allow us to be an enduring market leader?”

SMM: Sometimes you’re doing the blitscaling and sometimes you’re the one being blitzscaled. You actually recommend as a successful strategy to concede to a competitor and pivot to another area where you can blitzscale.

Yeh: When somebody is blitzscaling, they turn the market into a race for first place. You then have to be very realistic with yourself by asking, “Am I going to be the one standing at the gold medal podium when this is over?” If you think you can be, then great. Gear up, start sprinting and do what it takes to win that market and maintain your leadership. But if you look at the situation and say, “I don’t think there are a lot of scenarios under which I end up with the gold medal,” then rather than fight it out anyway, you would be better off using those resources on something where you can be the gold medalist. Companies like GM are saying, “We are not going to out-produce companies like Toyota when it comes to small cars. We’re going to stop doing that and focus on the things where we do have an advantage.”