Blitzscaling – Speed Over Efficiency!

Blitzscaling – A fascinating concept that is bound to transcend every aspiring entrepreneur to a fairy-tale finish. There’s a BUT (there always is!) to this path to easy success. As Reid puts, start-up is like jumping off a cliff and trying to make a plane on your way down!

To be honest, I didn’t really understand quite a few businesses in India and thought there’s so much wrong with their product/distribution/revenue model, yet some of those businesses doubled their size in a time span that surprised (shocked!) me. Little did I realize it was a feature, not a bug. This book, written by Reid Hoffman & Chris Yeh, explains it all with multiple examples of companies like Facebook, Amazon, Netflix, LinkedIn, Airbnb to name a few. Below is my interpretation of the book –

What is Blitzscaling?

• Derived from the World War 2 technique used by German General Heinz Guderian – ‘Blitzkreig’. The pace of attack along with the element of surprise overwhelms the opposition. Counter-intuitive to the traditional approach of measuring risks and taking decisions. Eg in corporate – Amazon increased the workforce by 50 times and grew revenues by 322 times in just 3 years (pre to post IPO)
• Predictability and efficiency is very important in the context of a stable, established market but when the market is up for grabs – if you win, efficiency isn’t that important; if you lose, efficiency is completely irrelevant. Prioritising speed over efficiency in the face of uncertainty
• But it is more than ‘get big fast’ to win the market. You need to be able to focus on the downsides of the risks by making small number of hypothesis about how the business will develop so that success can be understood and monitored with a constant course correction
• Blitzscaling occurs in an uncertain environment which leads to success or death in a really short time. Unless you’re like Microsoft or Google and can finance your growth from an exponentially growing revenue stream, you’ll need to try extremely hard to convince investors to give you their money on this gamble. Generally the sequence is : Classic Startup Growth (product market fit) -> Blitzscaling (gain critical mass) -> Fast Scaling (business maturity and certainty) -> Classic Scale up Growth (when you become industry leader)
• Uncontrolled growth is clearly undesirable. There is a scientific term for out of control growth: Cancer. This means you need to have just enough control that you can fix bugs while maintaining the speed

3 techniques of Blitzscaling – Business Model Innovation (not just technical model), Strategy Innovation & Management Innovation  

Business Model Innovation

• Dropping below 40% annual growth is a warning sign for investors. Why should I risk it all and potentially blow up a successful business? The answer is that Blitzscaling businesses tend to play in winner takes most/all markets
• Business model innovation has 4 growth factors –
  1. Market size (investors want the Bs baby! So the scale has to be in Billions & not Millions)
  2. Distribution (a good product with a great execution will always beat a great product with a poor distribution)
  3. High Gross Margins (higher gross margins mean more cash to fund growth and expansion)
  4. Network Effects (for sustaining growth)
• The downside of network effects is that you can’t start small and hope for growth. Until your product is widely adopted in a particular market, it offers little value to potential users. You’ve to reach the tipping point fast
• Growth limiters –
• 1. Lack of product/market fit (Make sure the product/service is relevant & desired by customers & constantly upgrade)
  2. Operational scalability (human and infrastructure)
• Underlying principles of Blitzscaling –
  1. Moore’s law (Netflix waited for a decade to get the internet infrastructure in place for it to realise its vision)
  2. Automation (growth of tech is way faster than humans; Netflix can produce more relevant content than any production house based on data of viewing habits)
  3. Adaptation and not optimisation (Adapt first to ensure you are the market leader; then optimise to retain your spot)
  4. The contrarian principle (As peter Thiel puts it – what important truth do very few people agree with you on? Read more on this here)

Strategy Innovation

• The only time it makes sense to blitzscale is when you have determined that speed into the market is the critical strategy to achieve massive outcomes
• Premature blitzscaling is fatal for the company and the market as well. Few factors to determine if the time is right –
  1. A big new opportunity (in terms of market size as well as gross margin)
  2. The first scaler advantage (we must not confuse critical mass with first mover advantage)
  3. Learning curve (Netflix moved from DVD renting to video streaming to producing content)
  4. Competition (the more intense the competition, the faster you should try to move)
  5. Good times and bad times (of the market)
  6. Going faster (by doing things that you won’t conventionally do)
• When to stop blitzscaling?
  1. Declining rate of growth (relative to market and competition)
  2. Worsening unit economics
  3. Decreasing per employee productivity
  4. Increasing management overhead
• Blitzscaling is iterative. It is an exercise in serial problem solving. Through the 5 stages –
  1. Do things that don’t scale (Airbnb had sent door-to-door photographers for hosts initially. Highly unscalable!)
  2. Reach the next stage of blitzscaling (Hire multiple photographers; train hosts on good quality pics; make the process intuitive for hosts)
  3. Figure out how to do one set of things that scale while also finding out ways to do a completely different set of things that don’t scale
  4. Reach the next stage of blitzscaling
  5. Repeat until you reach market dominance
• The role of founders also shifts from pulling the levers directly to taking strategic calls as the organisation moves from a family to a nation (A successful startup has a journey from Family -> Tribe -> City ->Nation as it grows in size)

Management Innovation

• 8 key transitions:
  1. Small teams to Large teams (marines are the start up people, army is the scale up people and police is the stability people; accordingly your approach/structure/processes shift)
  2. Generalists to Specialists (This doesn’t mean you have only specialists as your functions become larger; keep generalists as they can be redeployed much easily)
  3. Contributors to Managers to Executives (Contributor to Manager is a relatively easy transition; finding executives is the real challenge as not everyone can have the grand vision, strategic insight to drive business success. Loads of founders remain managers (Steve Wozniak) & businesses hire executives from outside (Sheryl Sandberg))
  4. Dialogue to Broadcasting (regular emails to employees are a common best practice)
  5. Inspiration to Data (Jeff Bezos is a Prime [pun intended] example of this – “If it comes to opinion, my opinion will always win over yours. Back your opinion with data”)
  6. Single focus to Multithreading (treat each thread as an individual non competing company)
  7. Pirate to Navy (from offence to offence and defence)
  8. Scaling yourself from founder to Leader (delegation, amplification, making yourself better)
• 9 counterintuitive rules :
  1. Embrace Chaos (accept uncertainty and take steps to manage)
  2. Hire Ms. Right Now not Ms. Right (hire who is just right for your current phase quickly)
  3. Tolerate “bad” management (transformation is the name of the game)
  4. Launch a product that embarrasses you (prevent analysis paralysis; walk a fine line between fixable and fatal flaws)
  5. Let fires burn (choose your urgent battles ; Maslovian hierarchy of fires – Distribution > Product > Revenue model > Operations > Competition > what’s next?)
  6. Do things that don’t scale (do throwaway work; just for survival)
  7. Ignore your customers (temporary solution until you fix the product/distribution; but don’t ignore their feedback while ignoring them)
  8. Raise too much money (for the unforeseeable; a lot of people do not raise more than required in order to prevent dilution)
  9. Evolve your culture (from organic to deliberate transmission of culture & values; this is required as every person cannot meet the core team)
• Avoid the pitfalls of Diversity Debt by hiring that leads to Homogeneity
• Scale companies can blitzscale too. The advantages an established organisation has –
  1. Scale (Scale provides the critical mass for exponential Blitzscaling)
  2. Iteration (you can finance multiple shots on goal)
  3. Longevity (patience for results to come out)
  4. M&A (simply buy any blitzscaling competition/supplementary business)
• Disadvantages of an established business to blitzscale –
  1. Incentives (favour cautious expansion than aggressive blitzscaling; penalty for a failure is much higher than incentive for success)
  2. Unstaged commitment (to prevent failure a manager will put all resources on a committed project)
  3. Public market pressure (Public markets are monitoring bottom-lines much more ruthlessly than VC markets – their focus is Top Line exponential growth)
• Silicon Valley’s 9 to 5 vs China’s 996 – China has Blitzscaled massively & is becoming the next Silicon Valley. This has been possible because of the work culture of 996 (work 9 am to 9 pm 6 days a week). This kind of dedication might be required in the initial stages Steve Jobs’ iconic ‘90 hrs/Wk & loving it’ T-shirt for the Macintosh team) but definitely not sustainable & this has to be normalized if the business aims for longevity (which, of course, Apple did too)
• What if your competition starts to Blitzscale? You have only 3 options for defending against blitzscaling – Beat them OR Join them OR Avoid them!
• Best and the worst part of pace of today’s change – there are no experts with 10+ years of experience in any domain!

Blitzscaling seems to be the answer for any Start-up but all credits to the author to caution the reader to make sure that Blitzcale only when you meet all the above criteria. If done wrong, Blitzscaling will lead to a fast & painful death that might have a lasting impact on your industry!

Do share your views/feedback in the comments section