In the beginning, every investor the founders approached had turned them down or, worse, ignored them. The company was on the upswing now, but the painful early days were still fresh in their minds, and they weren’t looking for another battle.
They had become billionaires by analyzing successful US companies, rapidly creating copycats in Europe, and, in many cases, selling those “cloned” companies to their original American inspirations.
On the other hand, Airbnb could reject the offer and instead take on the aggressive Samwer brothers in a head-to-head competition. But Wimdu had the home-turf advantage, not to mention 10 times the number of employees and more than 10 times the amount of invested capital. Competing against them would be one hell of an uphill battle.
“The Samwers gave us a gift. They forced us to scale faster than we ever would have.” By choosing to grow at a breakneck pace, Airbnb had achieved a dominant position in its market.
Zhang’s proposal represented not only a huge opportunity but also a huge risk, with equally huge uncertainty about the outcome. While a new messenger service might appeal to young consumers, it was probably going to cannibalize QQ, which was, after all, Tencent’s core business. Furthermore, Tencent had partnered with leading mobile carriers like China Mobile to receive 40% of the SMS charges that QQ users racked up when they sent messages to mobile phones. A new service could hurt Tencent’s financial bottom line and at the same time risk its relationships with some of China’s most powerful companies.
It was the sort of decision that publicly traded, 10K-person companies typically refer to a committee for further study. But Ma wasn’t a typical corporate executive. That very night, he gave Zhang the go-ahead to pursue the idea. Zhang put together a 10-person team, including 7 engineers, to build and launch the new product.
What came next was staggering. Just 16 months after Zhang’s fateful late-night message to Ma, WeChat celebrated its 100 millionth user. 6 months after that, it had grown to 200M users. 4 months after that, it had grown to 300M users.
Blitzscaling requires hypergrowth but goes beyond the blunt strategy of “get big fast” because it involves purposefully and intentionally doing things that don’t make sense according to traditional business thinking. In the Blitzscaling Era, you have to make a tough call:
- Take on the additional risk and discomfort of blitzscaling your company
- Or accept what might be the even greater risk of losing if your competition blitzscales before you do
Only 2.2% of profits that arise when firms are able to appropriate the returns from innovative activity went to the disrupters. Most of the benefit of technological change are passed on to consumers rather than captured by producers.
Taken together, SV’s 150 most valuable publicly traded technology companies are worth $3.5T. Those 150 companies alone make up 50% of the value of the NASDAQ, and they account for over 5% of the entire world’s market capitalization. That’s a lot of value created by a region with 3.5M-4M residents, or roughly 0.05% of the world’s population.
Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.
The classic approach to business strategy involves gathering information and making decisions when you can be reasonably confident of the results. Take risk, conventional wisdom says, but take calculated ones that you can both measure and afford. Implicitly, this technique prioritizes correctness and efficiency over speed.
Unfortunately, this cautious and measured approach falls apart when new technologies enable a new market or scramble an existing one.
When a market is up for grabs, the risk isn’t inefficiency — the risk is playing too safe. If you win, efficiency isn’t that important; if you lose, efficiency is completely irrelevant.
If the prize to be won is big enough, and the competition to win it is intense enough, blitzscaling becomes a rational, even optimal strategy.
Blitzscaling opens up access to capital, because investors generally prefer to back market leaders. You can win this mantle if you blitzscale, and with it raise more money more easily and more quickly than your lagging competitors.
On defense, blitzscaling lets you set a pace that keeps your competitors gasping simply to keep up, affording them little time and space to counterattack. Because they’re focused on responding to your moves, which can often take them by surprise and force them to play catch-up, they don’t have as much time available to develop and execute differentiated strategies that might threaten your position.
We believe that the mechanism behind the power of blitzscaling is “first-scaler advantage.” Once a scale-up occupies the high ground in its ecosystem, the networks around it recognize its leadership, and both talent and capital flood in.
There is a scientific term for out-of-control growth in the human body: “cancer.” In this context, uncontrolled growth is clearly undesirable. The same is true for a business. Successful blitzscaling means that you’re maintaining at least some level of control by rapidly fixing the things that will inevitably get broken so that the company can maintain its furious pace without flaming out or collapsing in on itself.
Each major increment of growth represents a qualitative as well as quantitative change. Drew Houston of Dropbox expressed this well when he told me, “The chessboard keeps adding new pieces and new dimensions over time.”
If technological innovation alone were enough, federal research labs would produce $100B companies on a regular basis.
Amazon may have started as a simple online retailer with no unique technology, but today its technological prowess in cloud computing, automated logistics, and voice recognition help to maintain its dominance. In fact, the megacompanies built by blitzscaling are often the ones buying the technology innovators, much as Google bought DeepMind and Facebook bought Oculus.
The funny thing is that some of our critics called us insane for paying customers bonuses to refer their friends. Those referral bonuses were actually brilliant, because their cost was so much lower than the standard cost of acquiring new financial services customers via advertising.
Peter, if you and I were standing on the roof of our office and throwing stacks of $100 bill off the edge as fast as our arms could go, we still wouldn’t be losing money as quickly as we are right now.
Growth doesn’t create value in and of itself; for that, it has to be paired with a working business model.
Here is one of the ruthless practices that has helped maked SV so successful: Investors will look at a company that is on an upward trajectory but doesn’t display the proverbial hockey stick of exponential growth and conclude that they need to either sell the business or take on additional risk that might increase the chances of achieving exponential growth. Achieving 20% annual growth, which would delight Wall Street analysts covering any other industry, simply isn’t enough to transform a startup into a multibillion-dollar company fast enough. SV VCs wants entrepreneurs to pursue exponential growth even if doing so costs more money and increases the chances that the business could fail, resulting in a bigger loss. Dropping below even 40% annual growth is a warning sign for investors.
Nokia is a great example of the cost of caution. In 2007, Nokia was the world’s largest and most successful maker of mobile phones, with a market capitalization of just under $99B. Then Apple and Samsung came blazing into the market. In 2013, Nokia sold its money-losing handset operations to Microsoft for $7B, and in 2016 Microsoft sold its feature phone assets and the Nokia handset brand to Foxconn and HMD for just $350M. That’s a drop in value of over 99% in less than a decade.
I am fond of pointing out to entrepreneurs and executives that “in theory, you don’t need practice.”
What I mean is that no matter how brilliant your business model and growth strategy, you won’t be able to build a real-world blockbuster company without a lot of practice. But that problem is magnified when you’re trying to blitzscale.
The kind of growth involved in blitzscaling typically means major human resources challenges. Tripling the number of employees each year isn’t uncommon. This requires a radically different approach to management than that of a typical growth company, which would be happy to grow 15% per year and can take time finding a few perfect hires and obsessing about corporate culture.
Yet when the wreckage of the dot-com crash cleared, the most successful companies still charging full steam ahead were the few startups that were designed around totally new business models, such as Amazon, eBay, and Google.
Walmart should have dominated online retail, yet Amazon emerged and practically wrote the bible for e-commerce, including consumer reviews, shopping carts, and free shipping.
Even though the business models of Google, Alibaba, and Facebook might seem obvious — even inevitable — after the fact, they weren’t widely appreciated at the time they launched. How many people in 1999 would have realized that running tiny text ads next to the equivalent of an electronic card catalog would lead to the world’s most valuable software company?
To deliver these above-market returns, VC funds need to at least triple their investors’ money. A $100M VC fund would need to return $300M over the typical 7-10-year life of a fund to achieve an above-market internal rate of return of 15-22%.
The cold and unromantic fact is that a good product with great distribution will almost always beat a great product with poor distribution.
Airbnb built a system that allowed and encouraged its hosts to cross-post their listings to the much-larger Craigslist. Hosts were told, “Reposting your listing from Airbnb to Craigslist increase your earnings by $500 a month on average,” and were allowed to dos by clicking a single button. This took serious technology skills but it was technology innovation for the purposes of distribution innovation, not product innovation.
Zero of the 5 people we tested succeeded. Zero of the 5 even came close. This was just stunning. We’re like, “Oh my God, this is the worst product ever created.” So we made a list of like 80 things in this Excel spreadsheet, then just sanded down all these rough edges in the experience, and watched our activation rate climb.”
In 2016, AWS accounted for 150% of Amazon’s operating income, which means that the retail business actually lost money.
Google had a gross margin of 61%. Facebook’s gross margin was 86%. Amazon’s is 35%. Yet even Amazon’s gross margins are greater than those of a “high margin” traditional company like GE (27%).
Not all revenue is created equal. The key insight here is that even though gross margins matter a great deal to the seller, they are irrelevant to the buyer. This means that it’s not necessarily any easier to sell a low-margin product than a high-margin product.
It’s important to note the difference between potential gross margin and realized gross margin. Many blitzscalers, such as Amazon or the Chinese hardware makers Huawei and Xiaomi, deliberately price their products to maximize market share rather than gross margins. As Jeff Bezos is fond of saying, “Your margin is my opportunity.” Xiaomi explicitly targets a net margin of 1-3%, a practice it credits Costco for inspiring.
At the end of 1996, the 5 most valuable companies in the world were GE, Royal Dutch Shell, the Coca-Cola Company, NTT (Nippon Telegraph and Telephone), and ExxonMobil — traditional industrial and consumer companies that relied on massive economies of scale and decades of branding to drive their value. Just 21 years later, the list looked very different: Apple, Google, Microsoft, Amazon, and Facebook.
Another, less obvious benefit to this model is that once a subscription business achieves scale, the predictability of its revenue streams allows it to be more aggressive with long-term investments, since it isn’t obliged to maintain large cash balances to weather short-term variations in the business. This financial firepower can represent a major competitive advantage. For example, Netflix, which announced plans to invest $6B in original content for its streaming service in 2017, has exploited its direct subscription model to outspend classic TV networks, which have to rely on less robust revenue streams like payments from cable providers and advertising sales.
In 2014, its first year of operation, LINE’s sticker business generated $75M in revenue. That figure grew to $270M in 2015, which represented over a quarter of LINE’s total revenue. Not bad for an intangible product with no intrinsic value.
1 hour of HD video requires transmitting 40GB of compressed data (over 400GB without compression). A standard 28.8K modem from that era would have taken over 4 months to transmit a single episode of Stranger Things.
Traditional TV commissions large numbers of pilot episodes, the majority of which never make it to series, trying to produce optimistically named “Must See TV” to appeal to a broad audience, which has to be convinced to tune in every single week.
The legendary screenwriter William Goldman famously wrote of Hollywood, “Nobody knows anything.” To which Reed Hastings replies, “Netflix does.”
Most great ideas look dumb at first. Being contrarian doesn’t mean that dumb people disagree with you; it means that smart people disagree with you. Most investors are smart, and most smart, successful people would probably agree that investing in proven ideas is better than investing in unproven ones.
Amazon was one of the first companies to fully grasp the possibilities of the Internet as a distribution platform in creating the first successful affiliate program, Amazon Associates, which incentivizes individuals and owners of other websites to refer customers to Amazon in exchange for a share of the revenues generated. This allows Amazon to turn everyone else’s website and online communications into a powerful distribution channel.
Because this marketplace business doesn’t require tying up Amazon’s capital in inventory (it ties up the 3rd-party sellers’ capital instead), its gross margins likely resemble high-margin eBay’s more than it does low-margin Walmart’s. As Benchmark’s Matt Cohler notes, “I sometimes wonder if Amazon’s owned-inventory business is just a marketing loss leader and a capital-intensive competitive moat.”
But many people don’t realize that it actually took Google a long time to find the right product for the right market. Google started off trying to sell enterprise search appliances, a tool that sits inside a corporate data center, indexing content stored on a company’s servers, then offering a Google search box to find items within that content.
At the time, the elevator pitch for Facebook would have been “social network for college students.”
The only time that it makes sense to blitzscale is when (whether for offensive or defensive reasons) you have determined that speed into the market is the critical strategy to achieve massive outcomes.
You don’t necessarily need to have solved your revenue model before deciding to blitzscale. In fact, a key element of blitzscaling is often the willingness of investors to fund growth before the revenue model is proven — after all, it’s pretty easy to fund growth after the revenue model is proven.
Why was Youtube at the right time? Networks were finally big enough to stream video. Cell phone cameras allowed everyone to record videos. And the investment environment allowed a very capital-intensive bet.
And because Netflix has greater confidence in its own predictions than its competitors have in theirs, it can outbid them for content when they go head-to-head.
All bold strategies have a risk. If you don’t see it, you’re flying risk-blind.
Just because you can blitzscale doesn’t mean that you should. Throwing out the rules of business doesn’t guarantee success any more than following the rules does.
Both Amazon and The French Laundry are great businesses, but they exist in fundamentally different world. Amazon’s business relies on massive scale and billions of dollars of infrastructure; The French Laundry relies on local ingredients of the highest quality, prepared by some of the most skilled cooks in the world. Scale is critical to e-commerce and cloud computing; scale is antithetical to world-class fine dining.
First, you might be the only competent player in your market space. This is extremely rare, because any attractive market space tends to draw in smart, aggressive entrepreneurs.
Startups that assume success and make commitments and investments accordingly can get a jump on their rivals — provided the market plays out as they anticipate. This kind of confidence manifests itself in being more aggressive about fund-raising, hiring, and infrastructure investment.
The Village-stage transition can be difficult for you as a founder, because it is at this phase that it becomes harder to see the immediate impact of your work. While you might know and interact with frontline employees, you’re not likely to be their direct manager anymore. Now you need to take a big-picture view and focus on designing the organization.
Coordinating the efforts of 10s or 100s of individuals — and ensuring alignment with the goals of the entire organization as a whole - requires planning and formal processes, often to the chagrin of an idealistic founder more interested in long-term vision than the minutiae of day-to-day management.
I started out 28 years ago with a total disdain for organizational matters. I just thought everyone who comes to this should be mission-driven, and we’re not going to have any hierarchy, and we’re going to pay everyone the same thing. About 5 years into this, I realized if I didn’t become obsessed with the very mundane matter of how to manage effectively, we’d never get there.
You’re also adding qualitatively different kinds of people to the team. One metaphor I use to explain this shift is to take yet another analogy from military history: the marines take the beach, the army take the country, and the police govern the country. Marines are startup people who are used to dealing with chaos and improvising solutions on the spot. Army soldiers are scale-up people 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 police rarely work well together.
Focus on responsibility instead of the specific title. An employee who runs the engineering “department” at the Family stage might consider it a demotion to be one of several directors of engineering at the City or Nation stage.
Running a major function for a City- or Nation-stage company requires deep domain expertise and isn’t something that a smart generalist can just “figure out” in a matter of weeks.
Managers are frontline leaders who worry about day-to-day tactics: they create, implement, and execute detailed plans that allow the organization to either do new things or do existing things more efficiently.
By contrast, the role of the executive is to lead managers. For the most part, executive don’t manage individual contributors. Instead, they focus on vision and strategy. Yet they are still connected to the frontline employees because they are also responsible for the “fighting spirit” of their organizations; they need to be role models who help people persist through inevitable adversity.
One of the typical challenges we discussed in the section on the transition from small teams to large teams is the need to recruit executives from outside the organization. This represents a major change in approach for a company that probably promoted from within to this point, rewarding early employees who emerged as natural leaders. However, the transition from manager to executive is generally far more difficult in these organizations than that from contributor to manager. Every employee has likely reported to managers with varying styles and qualities; when promoted to a 1st-time manager, they can draw on these experiences to help develop their own management style. But when an organization needs executives for the first time, internally promoted managers can’t draw on the experience working with executives at that company — because there weren’t any. There are no role models to provide guidance.
The situation is made worse when those founders wait until the strain on the organization has become unbearable before making the new hires, meaning that all the leaders are new to the company precisely at the time when tension and uncertainty are running high. The key to navigating this transition is open-mindedness: insiders need to be open to the outside ideas of the new executives, while the outsiders need to be open to learning from what happened before they arrived.
When launching their startups, many founders eschew hierarchy because of their egalitarian ideals. But as their firms scale, a growing number of people report to a handful of leaders. Founders may think this allows them to remain in command, because all decisions pass through them. But ironically, their organizations spin out of control as centralized authority becomes a bottleneck that hinders information flow, decision making, and execution. A couple of people at the top can’t effectively supervise everyone’s increasingly specialized day-to-day work; in such a system, accountability for organizational goals gets lost.
As the company grows, you have to shift from informal, in-person, individual conversations to formal, electronic, “push” broadcasting and online “pull” resources. You also have to shift from sharing all information by default to deciding on what is secret and what is shareable. If you don’t manage to develop an effective internal communications strategy, your organization will become disjointed and start to fall apart.
The key stats will evolve as your company grows. You can’t simply “set it and forget it” when it comes to data. The critical metrics for predicting the long-term viability of your business may be very different as you achieve scale, particularly if the environment is changing rapidly.
At the City and Nation stages, you’ll almost certainly need a dedicated BI team to ensure that the necessary data is getting to the people who need to support and carry out key decisions. The stakes are so high, and the cost of bad decisions so great, that the expense of a dedicated team is small in comparison.
Mark Pincus invested heavily in his BI team at Zynga, which allowed the company to track every click in their games rather than rely on Google Analytics like most of his competitors. “People would say, Zynga has 50 people working on analytics, this other company only has 10. Zynga must be dumb. Actually, collecting that data let us make and evaluate our bets faster.”
For a company like Google that’s doing a 100 different things, there’s a very long breadline to get the next good engineer. And if you’re project number 35, which is about where Google Drive was on their list, it’s going to take a long time before that team gets fed with any amazing people. When you consider the 11 players you put on the field versus your counterpart at a big company, you can actually have a massive talent advantage. Not because Google doesn’t have great engineers; they probably have better engineers than you. But the leader of the project is a midlevel product manager for whom it’s just the next rung on the ladder. As a founder, you’re just so much more committed, and your team is so much more committed.
Another famous Steve story involves an Apple strategy off-site where Apple’s top 100 people worked for a day to reduce Apple’s strategy to 10 key priorities, at which point Steve crossed off the bottom 7 items and said, “We can only do 3.”
Poorly designed incentives can make it nearly impossible to shut down a thread, even if its performance is poor, since its leadership might fight tooth and nail to stay open.
One of the people I’ve personally seen handle these issues with exceptional skill is Deep Nishar, LinkedIn’s former head of product and now at SoftBank. Deep set up LinnkedIn’s different product threads and expertly managed the product leaders to create a broader sense of ownership via a web of alignment. Each product leader was the owner of a primary thread, but was also partially accountable and compensated for his or her work in supporting a fellow product leader as a secondary thread.
During the early stages of blitzscaling — Family and Tribe — it’s easier to take risks because you don’t have much to loose. “Freedom is just another word for nothing left to lose.”
But if you succeed as a pirate, you’ll eventually win enough wealth and territory to blitzscale to the Village, City, and Nation stages. At that point, even the most inveterate pirates will have to trade in their Jolly Roger for the flag of a legitimate, disciplined navy. If they don’t, their organizations will devolve into chaos.
Eventually Captain Jack Sparrow has to grow up and start acting more like the sober and responsible Captain Picard.
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?”
Finally, you may order your naval task forces to launch diversionary attacks that yield little tactical advantage but that help the overall strategic situation. For example, Microsoft needs to field a search engine to compete with Google, even though it is unlikely to capture much market share, because Google is fielding productivity apps against Microsoft. At this phase, you should try to make your opponents defend every bit of their territories, because, if you succeed, they will be stretched too thin to ward off the attacks you actually consider important.
But while acting as a troubleshooter in chief might be a good fit for his personality, at the City or Nation stage, getting too involved in the details of individual problems is probably a poor use of a CEO’s time.
Kalanick, in other words, was doing what felt good to him rather than what the organization needed.
Any given management structure is likely to be temporary. You can’t run a Village the same way you run a Tribe. But without structure, you won’t make it to the next stage of growth.
I think a lot of entrepreneurs start with a lot of insecurity about what they don’t know. What you want is not to be paralyzed by it, but to harness it — to use that nervous energy to learn and make yourself better. You’ve got to keep your personal learning curve ahead of the company’s growth curve.
There are only 3 ways to scale yourself: delegation, amplification, and just plain making yourself better.
“Will someone else be able to do this as well as I can?” The answer is almost certainly “No, especially not at first, but they’ll probably figure it out over time, just like you did.”
Unlike a traditional assistant or even a technical assistant, your chief of staff should amplify your business impact: he or she should be a businessperson who can not only make certain decisions for you but also triage the important decisions that you have to make yourself. A chief of staff can also make sure that all the people who want to meet or interact with you are “briefed” in advance so that your time together can be as efficient and effective as possible.
There are no job descriptions for founders. If the role doesn’t change, there’s something wrong.
Mark and Sheryl meet first thing every Monday and at the end of every Friday — no matter how busy they are or what else has come up. The Friday meeting is especially important because it gives them time to look back over the week and reflect on what they’ve learned.
He and I have a scheduled dinner every month where (among other things) we share what we’ve learned and provide feedback.
I was too busy chopping wood to sharpen the axe. I didn’t understand that by making myself better, I was helping the company, even if I was away from work.
When you start a company, almost everything is an unknown, from the product/market fit, to the competitive landscape, to the composition of your future team. There is no way to eliminate all of these uncertainties with careful planning; most can only be resolved by doing. As a result, you have to take action even if you know you still have issues to resolve (and sometimes even if you don’t yet know exactly what those issues are).
Yet simply throwing up your hands is unlikely to bring success; passively succumbing to chaos is not a winning strategy. Embracing chaos, on the other hand, means accepting that uncertainty exists and therefore taking steps to manage it.
Other might prefer early stages because they enjoy the direct and tangible impact of being a key individual contributor or an important team leader over tackling the very different and more abstract work of being a full-time manager or executive.
Very few people excel at being an individual contributor, a manager, and an executive.
Yet while we knew meetings were important, we didn’t designate a note taker to capture key points and action items, a common and basic practice in SV.
Classic “good” management and planning presume a certain amount of stability that isn’t always available when you’re blitzscaling. One of the misconceptions of entrepreneurship is that you work out a plan and then execute it. Think of the embedded metaphor in “building” a business — the very language suggests that you’re following an architectural plan.
This approach delayed SocialNet’s launch by a year, and when we finally did launch, we quickly realized that half of the features we’d painstakingly implemented weren’t important, and half of the important things that our service would be useless without were missing because we hadn’t thought of them.
The first launch of LinkedIn fell well short of our expectations, but we didn’t do any harm. Before you release your product, make sure you know what you’re trying to learn, and how much risk you can take without endangering your customers or your reputation. Entrepreneurs have to walk a fine line between fixable and fatal flaws.
A free consumer product can get away with the most flaws, because consumers tend to be very tolerant when it comes to something that doesn’t cost them anything.
A free enterprise product needs to be more refined; even if it is free, the stakes are higher in a professional setting.
A paid enterprise product needs to be even more refined, but it can still have significant flaws, because these types of products are intended for expert users who may have no choice but to use the product.
A paid consumer product has the least room for error. They expect products they pay for to be nearly perfect.
People are often quite bad at predicting how they’ll react to changes. The scientific term is the inconsistency between predicted and observed behavior. When FB was considering adding a feature that would use facial recognition to automatically tag members’ faces in photographs, the focus group participants were very negative toward the concept, calling it “creepy” and an invasion of privacy. Yet when FB tested the feature, auto-tagging boosted engagement and users loved it.
You can’t ignore those fires forever — they are actually dangerous and will eventually require attention, but they aren’t relevant at most points during blitzscaling because extinguishing them doesn’t move the needle on the expected outcome.
The art, of course, is knowing which fires to let burn. Prioritizing your fires tends to be a function of a combination of different factors.
The first is urgency: Which fire is going to damage or kill your business the soonest? The second factor is efficacy: Which fires do you have the ability to extinguish right now, and which will be easier to extinguish later? The final factor is dependency: Will extinguishing A make it easier to extinguish B and C?
The planning fallacy is that you make a plan, which is usually best-case scenario. Then you assume that the outcome will follow your plan, even when you should know better.
Almost every entrepreneur I’ve worked with falls prey to the planning fallacy.
Culture is critical because it influences how people act in the absence of specific directives and rules, or when those rules reach their breaking point.
Bezos believes that memos encourage smarter questions and deeper thinking. Plus, because they’re self-contained (rather than requiring a person to present a deck), they are more easily distributed and consumed by a wider population within Amazon.
You have to walk a fine line as you evolve your culture — evolve it too slowly, and it will hold you back from adapting to new businesses and the changing world around you. Evolve it too quickly, and the Ship of Theseus illusion breaks down, and people no longer feel like they belong.
They reflected the fact that when you’re blitzscaling, the need for change never stops. Just when you’ve managed a key transition or successfully applied a counterintuitive rule, the game board changes, and you have to do it all again.
Every exciting new technology or market that once supported massive wealth creation eventually becomes a stable, boring industry. At various points in history, the cargo ship, railroad, and automobile industries spawned companies and innovations that changed the world and made generational fortunes. Today, they’re largely sleepy backwaters, a fate that is still better than irrelevance but unlikely to hold many exciting opportunities for large-scale growth.
DRAM, hard drives, and PCs allowed companies like Intel, Seagate, and Compaq to grow to massive value before becoming low-margin commodities.
The never-ending need for change should fill you with both fear and hope.
Speed is the foundation of Zara’s “fast fashion” business strategy, which, for decades, can be summarized in a single sentence: “Give customers what they want and get it to them faster than anyone else.”
While the labor costs might be higher than in China, and thus less “efficient,” they payoff is incredible responsiveness and speed.
Zara’s logistics model continues this preference for responsiveness over efficiency. Zara products are distributed in small batches, which requires more frequent shipments. The logistics costs are higher, but this allows Zara to get clothes to its stores in less than 24 hours for Europe, the Middle East, and America, and in less than 48 hours for Asia and Latin America.
What seems great today, in 2 weeks is the worst idea ever.
Chesapeake moved faster than any other company in its industry, deploying an army of land men to aggressively lease as much land as possible, with instructions to pay whatever was necessary, without knowing whether the gas deposits would justify the price. Hiring an army of land men and paying top dollar for leases sight unseen seemed inefficient until the wells started producing. Chesapeake’s willingness to blitzscale paid off as improvements in fracking technology made its wells insanely profitable — at first.
To be able to borrow money for 10 years and ride out boom-and-burst cycles was almost as important an insight as horizontal drilling. If something didn’t work for a little bit of time, we could regroup and find something that did work.”
Large companies can (if they have patient shareholders) have longer time horizons than start-ups, which need to show immediate results to continue raising money.
As with direct blitzscaling, succeeding with an M&A strategy requires having a rare or unique insight into the market; had all the players in the travel space known the value of online hotel booking, Priceline wouldn’t have been able to afford the Booking.com acquisition.
Successful companies generally assume that they already have something valuable, which means risk taking tends to be penalized. Companies also face pressures from shareholders, analysts, and the press. Moreover, the potential rewards have to be huge to matter.
The employee or executive who proposes a risky blitzscaling initiative is the one who stands to gain the most from its success. In contrast, other employees gain little from that success, and might even end up losing if that success allows its champion to jump over them for promotions or bonuses. And if the initiative is unsuccessful and costs the company a large sum of money, its employees all bear the cost of failure as well. Is it any wonder that so many bold initiatives are killed in committee?
Staying in Day 1 requires you to experiment patiently, accept failures, plant seeds, protect saplings, and double down when you see customer delight.
Emerging ecosystems lack many of the platforms that established ecosystems like SV or, more broadly, the US market provide — for example, payment systems and shipping vendors, let alone professional service providers (lawyers, accountants, etc.), experienced executives, and aggressive VCs. This makes blitzscaling more difficult and leads to slower rates of growth.
In 2016, the volume of mobile payments in China was $8.6T. In other words, China’s mobile payments market was nearly 77 times that of the US. Didi Chuxing provides 20M rides per day in China, over triple the volume of Uber worldwide. These factors give China a major advantage over almost every other ecosystem when it comes to the growth factor of market size.
It would take 9 months to find that many qualified engineers in the US. In China, it took 15 days.
The Chinese market views growth as the first, last, and best solution to almost any issue. Perhaps this is why Chinese startups tend to scale up at an even faster tempo than SV firms.
China’s speed demonstrates the value of intense competition as a motivator. On one occasion, Xiaomi’s Lei Jun told me, “You American entrepreneurs are lazy. The vast majority of my company is still working at 9pm on a Saturday night.”
Of the 73 women in the world who are self-made billionaire, 49 (over two-thirds) live in China. 8 of the 10 wealthiest self-made women in the world are Chinese.
Unlike in SV, in China senior managers are rarely brought in from external companies, and the few that have been hired typically haven’t worked out well.
When I travel and speak in China, I find that my audiences are familiar with what is happening in SV. Most Chinese executives speak and read English, and are reading the latest English-language news on a daily basis. How many American or European executives read Chinese and are staying abreast of developments in China?
The rope-a-dope calls for allowing an opponent to punch himself out; when that opponent is exhausted, you can beat him with a counterattack.
Madison was addressing the dangers of “factions;” that is, specific groups that act against the interests of the entire community. Madison argued that faction were a natural consequence of liberty and, to safeguard against them, the best strategy was to create a diverse society in which no particular faction would be able to dominate. “Extend the sphere, and you take in a greater variety of parties and interests; you make it less probable that a majority of the whole will have a common motive to invade the rights of other citizens; or if such a common motive exists, it will be more difficult for all who feel it to discover their own strength, and to act in unison with each other.” We believe the same approach applies to economics as well as politics; in other words, that a greater variety of powerful companies — if they are prevented from colluding — can counterbalance the malevolent or selfish goals of any one particular entity.
Uncertainty by itself isn’t risk; it simply produces unknowns, and unknowns aren’t inherently negative. As anyone who has ever read a mystery novel or traveled to a new city or learned a new language can attest, one of the great joys of life is the journey of discovery, of turning the unknown into the known.
However, when you combine uncertainty with the possibility of a negative outcome, you produce risk. The magnitude of the risk is a function of the probability, and severity, of that potential negative outcome. Blitzscaling always involve risks, but all risks aren’t equal. This is why you need to distinguish between systemic and nonsystemic risk.
Nonsystemic risk is localized and, at most, affects a part of the system. Systemic risk can impact or even destroy the entire system, either directly or as the result of cascading problems.
An article in Slate enumerated the many times in history that critics have argued that new mediums for consuming information would ruin society. Socrates warned against the pernicious effects of the written words, which he believed would harm memory. In the 16th century, Conrad Gessner tried to compile a list of every book, an effort that led him to conclude that the newfangled printing press had resulted in an overabundance of data that was “confusing and harmful” to the mind. Guillaume wrote that the newspapers socially isolated their readers, who would otherwise get their news from their church pulpits.
The rapid change that blitzscaling brings can be disruptive and thus frightening. The natural impulse is to try to slow down blitzscaling, whether through taxes or regulations. The problem with giving in to this understandable instinct is that change is going to happen whether it originates in your backyard or not. Slowing things down might make you feel more comfortable, but it comes at the cost of allowing competitors from other areas to gain lasting dominance of the global market.
When Hamilton proposed a nationwide banking system for the US in the 1790s, it took nearly a century for his vision to be realized. M-Pesa did this for multiple countries in just 10 years.
Speed and uncertainty are the new stability.
As new technologies and trends emerge, the uncertainty of where they are headed will paralyze many people and keep them from acting. Those who are willing to act — and act quickly — despite the uncertainty will have a disproportionate advantage.