All you need to know to start Blitzscaling. For more information on how to Blitzscale, how to Blitzscale with startups, or how to scale new businesses we recommend reaching out to Valuer.
The latest talk of the town in the business world is this book:
Reid Hoffman, co-founder of LinkedIn and Chris Yeh have written another book, this time about how to quickly scale-up a startup. This methodology explains how companies such as Amazon, Uber, or Facebook have been able to grow so big so quickly.
This article follows the same structure and order as the original book and serves as a summary of the book.
Part One: What is Blitzscaling?
Blitzscaling is the “prioritiz[ation] [of] speed over efficiency in an environment of uncertainty” - Reid Hoffman
Blitzscaling is a way to grow your startup quickly and it involves taking big risks.
Such a task also requires a large capital injection or other means of financing the expected exponential growth.
It is about bringing speed to your organization. Think of Uber, by scaling fast they became the dominant car-sharing app. Along the way, they have improved their service, but above all else they prioritized speed.
The five stages of Blitzscaling
As a startup scales, they will quickly move along these stages. And to growth hack your way to stage five, there are three techniques within Blitzscaling identified by Hofmann and Yeh.
The key techniques of Blitzscaling
The three key techniques of Blitzscaling are business model innovation, strategy innovation, and management innovation.
Business Model Innovation - Produce a Business Model which can be Blitzscaled. Usually, this takes the form of a digital product appealing to a large audience. Most software solutions aren’t going to require building supply chain management networks, infrastructure channels, or a warehouse for products.
Strategy Innovation - A strategy prioritizing speed over efficiency and takes risks even in the face of uncertainty. This is one of the hardest aspects of managing a product launch, “make something ugly.” Meaning, your first iteration isn’t supposed to be perfect; far from it. But test the model and the market and see if there is enough interest, then keep going.
Management Innovation - The necessary managerial practices to handle the growth and size of the company. The people who started the company are not necessarily going to be the best ones at continuing growth. New people will get hired and the initially held roles will change.
Part Two: Business Model Innovation
Business model innovations are new business models that challenge the status quo with unconventional ideas.
A Blitzscaling business model stands out and takes on risk. In part, they scale innovation.
Take Google as an example. In the early days, their business model relied on running small online ads. This was considered unconventional at the time of their launch but propelled them to become the digital powerhouse they are today.
The growth factors and limiters of business model innovation
A best practice in startup or small business management, particularly when developing a business model, is to consider the growth factors and growth limiters. Below, the growth factors and limiters will be explained in detail.
Factor #1: Market size
By limiting a young company to a niche market with a relatively "small" customer base, the startup will have less growth potential. The smaller the niche, the fewer customers you'll have. In a large market, there should be a broad variety of customers as well as efficient channels to reach them.
In the long-run, your main business market is likely to change. Apple originally sold personal computers. Today this only accounts for 10 percent of their total revenue! Today, the majority of their revenue comes from iPhone sales.
The same effect can also be seen at Amazon. They went from ‘just an online bookstore’ to dominating multiple fields of retail.
Factor #2: Distribution
You can have a great product, but you need even better distribution to really make it successful.
For this, you need two distribution techniques: leveraging existing networks and virality.
Leveraging existing networks
By using already existing platforms, one can gain the necessary exposure and traction to reach many customers.
This is the process of one user bringing in additional users. Just think of the last meme or video you shared with your friends and then they shared with their friends, and so on. It can be organic or paid.
Think of the apps you use where you receive referral benefits.
For example, PayPal rewarded customers $10 for referring a friend.
Dropbox offered non-monetary rewards in the form of extra free online space for referrals.
Grammarly gave customers access to premium for a week whenever a friend signed up. You get the gist.
Factor #3: High gross margins
Tech businesses, especially SaaS companies, often have very high margins as scaling non-tangible products is easier.
Imagine you have a factory where you produce chairs. Every time you want to sell a new chair, you have to get new wood, cut, shape, and finish the production from scratch. However if you have created a computer program, all you have to do is copy the files and code. There is no additional cost in making another copy of the program but to produce the new chair you needed to buy new materials.
The high gross margins allow for a steady flow of cash and therefore allow for huge growth and investors often look for these high margins. This makes a Blitzscaling company more attractive.
Amazon’s profitability does not lie in its low-margin retailing but rather its high-margin Amazon Web Services (AWS) cloud service. Many of the big tech firms have gross margins in the area of 60-80%.
Factor #4: Network effects
The above-mentioned factors are important to create growth. But to sustain it a network effect is needed. These effects occur when one user increases their use of a product, thus increasing the value for other users.
There are 5 categories of network effects:
Direct network effects
The more I use Facebook messenger, Snapchat, or WhatsApp, the more valuable it becomes.
Indirect network effects
The more people use an iPhone as a form of everyday communication, the more apps will be made for the app store, making the iPhone better!
Two-sided network effects
The more users on Airbnb, the more people will put listings on Airbnb. This leads to an increase in the number of users of Airbnb. Another example is more users on Uber, leading to more drivers signing up for Uber, leading to more people using Uber.
Local network effects
Free calls to anyone from the same phone carrier, or people you designate as ‘family’ or ‘favorites’.
Once Microsoft Word became dominant, other users had to also install and use Microsoft Word leading to them becoming even more dominant.
Below are the limiters.
Limiter #1: lack of product/market fit
As hinted by the name, there is a mismatch between the needs of the market and the benefit the product offers. Picking a market which is untapped and therefore full of potential is a lot easier than trying to break into a crowded space.
Limiter #2: operational scalability
The business model should be designed in a scalable way. As you are scaling, demand may explode, and the startup should be able to meet demand.
The demand for Tesla cars has grown since their initial release. However, due to the capacity constraints of their manufacturing facilities, they have not been able to meet demand and often sell out.
Blitzscaling requires a company also expand its operations quickly to meet new demand.
Proven business model patterns
It may be useful for you to follow one of the seven models businesses have successfully used to grow their companies.
Underlying principles of business model innovation
Hofmann and Yeh have attributed the principles behind innovation to fit within four main categories.
Gordon Moore, co-founder of Intel, found the number of transistors on integrated circuits doubles every year. This was back in 1965. Now Moore’s Law encompasses the idea that due to the speed of innovation, the capability of our technologies increases rapidly.
[Related Article - A COMPREHENSIVE GUIDE: THE FUTURE OF NANOTECHNOLOGY]
Consider Netflix. Reid Hoffman and Chris Yeh write
When he started Netflix, his long-term vision was to provide television on-demand, delivered via the Internet. But back in 1997, the technology simply wasn’t ready for his vision—remember, this was during the era of dial-up Internet access. One hour of high-definition video requires transmitting 40 GB of compressed data (over 400 GB without compression). A standard 28.8K modem from that era would have taken over four months to transmit a single episode of Stranger Things.
For Blitzscaling, a level of automation is needed. Hoffman explains there are some tasks which computer systems can perform “faster, cheaper and more reliabl[y] than human beings.”
Adaptation, not optimization
Instead of focusing on optimizing an already existing process, think about adapting to the market’s needs. Various growth hacking strategies can be implemented here.
Amazon didn’t just optimize its process for selling books but ventured into new markets such as cloud computing and adapted to market needs while also expanding its own retail capabilities.
The contrarian principle
Often Blitzscaling involves going against conventional wisdom and taking risks. This gives a huge advantage to the scale-up of a startup.
So who has used these principles?
LinkedIn, Amazon, Google, Facebook, are among the best examples of former startups which have used these underlying principles and brilliantly harnessed the power of the growth factors while reducing growth limiters. These are now multi-billion dollar companies. The book goes in-depth with a case study of each one.
Part Three: Strategy Innovation
When should you Blitzscale?
A big new opportunity. There is a potential market with big enough gross margins to create value.
First-scaler advantage. If no other company has been the first to scale-up and achieve critical mass, you have the opportunity to do so and gain a competitive advantage.
Learning Curve. Be the first to climb up a steep learning curve and thereby leave others lagging far behind.
Competition. If there is no competitive threat to you, then a safer scale-up approach may be favored. If there is competition, then moving fast is a priority.
When Airbnb saw competition developing in Europe, it quickly expanded and invested great sums of money as to not lose the European market.
When should you stop?
As you can imagine, companies like Facebook or Google are no longer Blitzscaling. You can Blitzscale when the market is big or growing fast. Once the growth stops or reaches a limit, then stop Blitzscaling.
The book lists some indicators of when to stop:
-A declining rate of growth (relative to the market and competition).
-Worsening unit economics.
-Decreasing per-employee productivity.
-Increasing management overhead.
One example of a company which did not stop, and ultimately failed to grow, is Groupon. The authors point out Groupon should have stopped Blitzscaling when the market began to plateau.
Can you choose not to Blitzscale?
Yes, if the market does not allow it or you do not have access to the required capital.
How does Blitzscaling change in each stage?
During the Family and Tribe stages, there are three conditions which aid Blitzscaling:
“You might be the only competent player in your market space”
“You might be the first player in your market to have figured out a brilliant growth strategy”
“Distinguish[ing] yourself from your peers by pursuing scale more resolutely”
At Village and City stages, “Blitzscaling is less about raw aggression and more about pursuing a differentiated (but still aggressive) strategy.”
Lastly, on the Nation stage, the company will likely dominate the market and does not need to focus on growing faster than the overall market.
How the role of the founder changes in each stage
As the startup grows, the roles and nature of the relationships between founders, managers, and employees will change.
Part Four: Management Innovation
The eight key transitions of Blitzscaling are:
1. Small teams to large teams
As you move through the different stages the management style will change in the company. The roles and level of involvement of founders, executives, managers, and employees will need to change and new departments will be made.
2. Generalists to specialists
In the start, you will hire smart generalists. As time passes you will need to shift to hiring specialists. They will be less flexible than generalists but have expertise in a certain areas.
3. Contributors to managers to executives
At the early stages, there is usually no need for formal managers. As the company grows, managers are needed for departments to function.
The founders, CEO, and executives cannot be all places at once. Their roles shift into the supervision of managers. They decide on a strategy and other grand elements but do not have direct interaction with day to day tasks.
4. Dialogue to broadcasting
You may start out all fitting in the same room, but as you grow in size you will need new tools such as Slack, Skype, or Google Hangouts to effectively communicate with your company. Humans are social animals. Informal bonds at work are also required.
5. Inspiration to data
Data is more important than your opinions, so make decisions based on data. For this, data from your users is needed.
6. Single focus to multithreading
At the start you will usually sell one product, but as you scale you will need to expand your product line. For example, Google does not just have a search engine but also other services such as Gmail, Youtube, Google Drive, and so on.
7. Pirate to navy
As you grow in size, you will go from playing offense to playing offense and defense. This is the idea of going from being a Pirate to a Navy Officer.
As Reid Hoffman and Chris Yeh put it, “Eventually Captain Jack Sparrow has to grow up and start acting more like the sober and responsible Captain Picard.”
8. Scaling yourself: founder to leader
As you Blitzscale, it is necessary for the founders to become leaders. There are three ways to scale yourself: “delegation, amplification, and just plain making yourself better.”
Nine counterintuitive rules of Blitzscaling
Rule #1 Embrace chaos
Accept you will be facing uncertainty and taking risks. Have plans ready to deal with problems you face, not just a plan A and B. You have to be able to correct your mistakes.
Rule #2 Hire Ms. Right now, not Ms. Right
Hire according to who is needed in that moment. You need managers suitable for the stage of growth you are at, not necessarily someone who has a lot of experience but at a much later stage.
Rule #3 Tolerate “bad” management
Expect disorganization and chaos as you scale. Management operations won’t always flow smoothly and there might even be a lack of management. This is fine as long as everyone gets on with their focused job.
Rule #4 Launch a product that embarrasses you
If the choice is between going to market quickly with a less than perfect product or taking your time to refine your product, go to market. Speed is everything.
Valuable feedback will come from the market which can be used to improve the product. Free products have more room for error than a paid product.
Rule #5 Let Fires Burn ?
Reid Hoffman “often tell[s] entrepreneurs that starting a company is like jumping off a cliff and assembling an airplane on the way down.”
You will have multiple fires burning, but you have to choose which ones to put out. You don’t have the resources to solve all the problems which require your attention. Focus on the problems that, if left unchecked, would destroy the company. Pick and choose. Saying no is just as important as saying yes.
Rule #6 Do things that don't scale
The point of Blitzscaling is to choose speed over efficiency. Sometimes this requires you to get things done in order to get to market faster, rather than doing what would essentially become the most efficient and sustainable in the long-run.
When Airbnb launched their apartment listings, the photos were of bad quality. The co-founders went out and took photographs of the listings themselves and borrowed professional cameras from the Rhode Island School of Design.
Rule #7 Ignore your customers
You won’t always be able to provide adequate customer service. Perhaps you will only offer email support or a FAQ, leaving customers to figure out things themselves or together via forums or other channels.
Listen to your customers, but if it is slowing you down, then it might be one of those fires to ignore. Eventually, though, you will have to listen to your customers.
Rule #8 Raise too much money
By always having excess cash, you will have enough to deal with the ‘unforeseeable’ which will arise during Blitzscaling. Things are unlikely to follow your best-case scenario. Blitzscaling startups burn a ton of money to drive growth.
Rule #9 Evolve your culture
Culture is important for the success of your business and Blitzscaling efforts. If you have a weak workplace culture, your organization could break apart.
Mark Zuckerberg’s motto at Facebook was “move fast and break things”, which gives you a sense of the culture at Facebook, one of not being afraid of trying new things.
Part Five: The Broader Landscape of Blitzscaling
Blitzscaling beyond high tech
Blitzscaling is not only relevant for tech startups but can be used across different industries. What is needed are the strong growth factors and the ability to overcome the growth limiters.
Blitzscaling within a larger organization
Existing organizations can also Blitzscale if they are able to take risks and make adjustments. Startups have the advantage of flexibility, having less to lose, and being risk-takers.
Blitzscaling beyond business
Blitzscaling can apply to NGOs or governmental institutions. An example could be Barack Obama using Blitzscaling to go from a one-term Senator to becoming the President of the United States of America.
For NGOs or government, the metrics will not be monetary but instead, statistical measures. For example, instead of gross margin, something like “impact per dollar” can be used. Network effects and other concepts mentioned in the Blitzscaling methodology still apply.
China the land of Blitzscaling and other regions to watch
Although places such as Silicon Valley usually receive the most attention as a startup hub, there are many places in the world to watch.
Within the USA, Boston, Austin, and Boulder have also become tech hubs. In Europe, it is cities such as London, Stockholm, Copenhagen, and Berlin.
Spotify from Stockholm is one example. As Stockholm University writes, “it is worth mentioning that the Swedish capital is second only to Silicon Valley in the US when it comes to the number of 'unicorns' – billion-dollar tech companies – that it produces per capita.”
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Reid Hoffman and Chris Yeh proclaim China as the land of Blitzscaling with PwC “project[ing] that China’s economy will overtake that of the United States in size by 2030.”
This is due to:
-The flexible labor market policies.
-Chinese work ethic.
-Large consumer base due to a rising middle class.
-A massive supply of both skilled and unskilled labor.
-The risk-taking nature of the Chinese.
These factors, as well as the willingness of investors to fund risky startups, make China an ideal place for Blitzscaling.
Defending against Blitzscaling
There are three options to protect yourself against Blitzscaling.
You can either beat the competition by waiting for them to fail and then continuing as usual. The other option is ‘join them’ by Blitzscaling yourself or working with them. Lastly, you can ‘avoid them’ by pivoting to another market or field.
1. Beat them
Blitzscaling is risky. It is quite possible some will fail. Therefore, it may be best for your business to follow your traditional business model or scale-up and wait for the storm to pass by not overreacting.
2. Join them
If Blitzscaling makes sense in your market, consider launching your own Blitzscaling efforts. Another option is to partner up with Blitzscaling startups and not compete with them.
Established corporations have a lot to gain from collaboration with startups. The startups bring new mindsets, cultures, and technologies. The startups can be a sort of innovation hub for corporations. The startups also gain valuable knowledge and funding from corporations.
There are companies, such as Valuer, a startup scouting platform using a mix of artificial intelligence (machine learning algorithms) and human expertise (agents and experts), to match corporations to startups.
The question of partnering up with startups is not just a question of new opportunities but also one of surviving. Imagine if Yahoo had bought Google when it had the chance? The whole world would be quite different.
3. Avoid them
Reid Hoffman and Chris Yeh write, “The final and perhaps most often ‘successful’ option is to cede the current market to Blitzscalers and use your current assets to migrate to a new, less vulnerable market.”
An example is how more and more individual bookstores have pivoted towards becoming community-oriented, hosting events such as book club meetings.
Although Amazon has become dominant, it is not a physical place for people to meet authors or other book readers. It lacks the ambiance of a bookstore with the smell of books and does not have a staff to help you.
Another example is how IBM pivoted from selling personal computers to more expansive offerings such as information technology consulting. In 2005, it sold the famous ThinkPad and its personal computer business to Lenovo.
Part Six: Responsible Blitzscaling
During Blitzscaling, companies will go to any length to win and become the quickest to scale in the process. Consequently, they forget about their larger social goals. It is therefore vital to pursue responsible Blitzscaling.
Blitzscaling in society
Blitzscaling is not just about maximizing profits for shareholders. One should also follow the law and add value to society. After all, it is in this society you are going to operate. Morality shouldn’t disappear.
If a government sees you are behaving in a responsible way, they will not attempt to regulate your company. Regulation usually comes as a backlash toward irresponsible behavior.
Framework for responsible Blitzscaling
The response spectrum breaks down four categories of responses to risks.
Reid Hoffman and Chris Yeh provide this chart:
Using this framework, one can categorize the different risks and get a better understanding of how to evaluate risk.
Building responsibility and velocity as the organization grows
In the early stages, the Family and Tribe stages, you should set the foundations of an organization with a strong mission, including being a responsible part of society.
As you move into the Village stage, you should fix the things which will be impossible to fix later. During this stage, your main priority will be speed and growth, therefore you might have to make commitments to fix issues at a later stage.
Lastly, at the City or Nation Stage, your organization will become a role model and leading member of society. This comes with responsibility.
Any previously ignored issues need to be fixed. This can be economic, social, criminal, or other forms of justice. Always stay ahead and tackle the issues head-on - or society will try to correct it for you.
Why are startups important?
Entrepreneurship is an important part of society. As Steven Pinker shows in his books Enlightenment Now and The Better Angels of Our Nature, human societies do on general better today than we ever have before.
We have higher life expectancies, we are more connected than ever before, there are fewer wars and violence, there is more equality and political representation, poverty rates are lower, and fewer people suffer from starvation.
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How did we get here? A lot of it is thanks to technologies and the ingenuities of the human mind.
Businesses do make profits, but they also help push forward entire civilizations and human societies. Their innovations offer a higher standard of living, better medicines, and free up our time.
This is not to say there are no risks or downsides to the exponential changes we see in technologies.
Social media brings with it entirely new problems of the ethics of persuasion, negative effects on discourse and political manipulation, privacy, and so on. Newer technologies have also not always been great for the environment. These are but a few examples.
In conclusion, we have seen that by using Blitzscaling, a startup or organization can scale-up at lightning speed.
Markets today are often ‘winner takes all’ - so if a market is up for grabs, then it is time to strike. As Reid Hoffman and Chris Yeh write:
“When a market is up for grabs, the risk isn’t inefficiency – the risk is playing it too safe. If you win, efficiency isn’t that important; if you lose, efficiency is completely irrelevant.”
Uber was able to use dual-network effects by giving both drivers an incentive of a bigger share of the ride fee and offering cheaper rides to passengers.
Amazon has been reinvesting all of its profits into growth rather than following conventional dividends models for businesses.
The founders of Airbnb even went out to take professional photographs of listings themselves. Paypal leveraged the eBay platform to gain customers.
Facebook offered a great innovative social media platform which focused on sharing and made a key move towards developing its mobile platform and then hired Sheryl Sandberg to lead it to become an advertising giant.
All of this thanks to Blitzscaling.
Who is Valuer?
At Valuer, we initiate corporate-startup collaborations.
We assess startups through our startup partnership platform and provide businesses with a tool to find and scale new initiatives. Our startup scouting algorithm combines artificial intelligence (machine learning algorithms), human expertise and agents, and learning material ideal for a startup assessment platform.
Why are corporate-startup partnerships important?
A corporate-startup partnership can lead to significant gains on both sides. Corporations maintain a competitive edge and adapt to the digitalization era. Startups can benefit greatly from the guidance, expertise, and wealth of resources from corporations. As demonstrated by this guide, a startup today needs a lot of money to scale quickly.
A corporation can acquire new technology and expertise, as well as a new mindset from startups who are notorious for their unique work culture, hierarchy, and organizational structures. Their flexible and open culture gives them the freedom to disrupt and create solutions for problems faced by large firms.
There are many examples of Blitzscaling corporations given throughout this guide. Whether you are looking for how to Blitzscale or how to Blitzscale with startups, there are some valuable lessons to be learned.
There are many ways to scale your startup or be a digital corporate accelerator, but hopefully, this guide has been useful for you.