One of the many things I intend to do in 2019 is at least one book review every fortnight. To kick-off this habit, today I’ll be reviewing Reid Hoffman’s classic titled “Blitzscaling”: The Secret Weapon for Building Scale-Ups. This is a navigation guidebook on the network effects in any fast-moving, fast-growing industry– a world where winner takes all.
What is “Blitzscaling”?
QUOTE: “Blitzscaling is a strategy and set of techniques for driving and managing extremely rapid growth that prioritize speed over efficiency in an environment of uncertainty.
Put another way, it’s an accelerant that allows your company to grow at a furious pace that knocks the competition out of the water. 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.”
Well, this sounds like a lot of risk, doesn’t it. So why do companies even think of blitzscaling?
According to the authors, startups in a highly competitive and growing environment doesn’t have that much of a choice. Because when push comes to shove, startups can opt to:
- Take on the additional risk and discomfort of blitzscaling their company; Or
- Accept what might be the even greater risk of losing if their competition blitzscales before they do.
Why I Made Time For This Book
The reason why I’ve chosen to read this book is because I want to be ahead in the cryptocurrency/ blockchain space by coming up with a systematic analysis to navigate the space. In fact, I don’t just want to be ahead, I want to “take all” in a particular niche in that space. I also agree with–
““Today, multiple major waves seem to be arriving simultaneously—technologies like the cloud, AI, AR/ VR, not to mention more esoteric projects like supersonic planes and hyperloops. What’s more, rather than being concentrated narrowly in a personal computer industry that was essentially a niche market, today’s new technologies impact nearly every part of the economy, creating many new opportunities. This trend holds tremendous promise. Precision medicine will use computing power to revolutionize health care. Smart grids use software to dramatically improve power efficiency and enable the spread of renewable energy sources like solar roofs. And computational biology might allow us to improve life itself. Blitzscaling can help these advances spread and magnify their sorely needed impact.” “
In my view, because multiple major waves are arriving simultaneously, the startup/ thought leader who can “sweep it all” would be the one who is a quick learner and scaler in two or more areas. The book did promise the discussion of strategies and tactics, which is a main draw in why I had wanted to read it in detail.
In particular, I strongly agree with the premise of Blitzscaling, as follows:
“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.”
The cryptocurrency/ blockchain space is obviously still “up for grabs”, at least related to STO/ ICO in the next 1-2years. It is very true that the winner will take all, if not most of the market.
The subtle difference between the concept of thought leadership and prioritizing speed over efficiency in the face of uncertainty is the idea of systematically managing risks. The ICO/ STO market freaking changes every other 3 months, and this is likely to be the norm as regulators also struggle to keep up.
This brings to mind Nassim Taleb’s Antifragile, which teaches us to embrace chaos–because chaos only makes a system engineered to embrace chaos stronger.
Business Model Innovation Trumps Technological Innovation Every Time
It might be tempting to assume that superior technology is always the first priority when it comes to any startup dominating a certain space in industry. This could not be further than the truth–while superior or the best technology is important, they are often second or third priority in sweeping the market.
The first priority is instead, business model innovation.
QUOTE: “A major mistake made by many start-ups around the world is focusing on the technology, the software, the product, and the design, but neglecting to ever figure out the business. And by “business” we simply mean how the company makes money by acquiring and serving its customers.
In contrast, despite the popular “engineers are gods” narrative prevalent in Silicon Valley, the companies and founders we universally hail as geniuses aren’t just technology nerds—they’re almost always business nerds too.
At Google, Larry Page and Sergey Brin built great search algorithms, but it was their innovations to the search engine business model—specifically, considering relevance and performance when displaying advertisements rather than simply renting space to the highest bidder—that drove their massive success.
Business model innovation is how start-ups are able to outcompete established competitors who typically hold a host of advantages over any upstarts. As a start-up, Dropbox competes with giants like Microsoft and Google, who ought to have major advantages in technology, finance, and market power.
Dropbox founder and CEO Drew Houston knows that his company can’t simply rely on better technology or out-executing the competition: “If your playbook is the same as your competitor’s, you are in trouble, because chances are they are just going to run your playbook with a lot more resources!”
Drew had to design a better business model, in which the focus on sharing files means that the number of files Dropbox has to store (or in the past, pay Amazon to store) increases far more slowly than the value created for the customer and thus the revenues Dropbox can collect from those customers. Uber and Airbnb also built large businesses at incredible speed based on novel business models rather than unprecedented new technologies.
If technological innovation alone were enough, federal research labs would produce $100 billion companies on a regular basis. Spoiler alert: they don’t.
This is not to say that technology innovation is unimportant. Technology innovation is the most common trigger for launching a new market or upending an existing one.
I really liked this part because it talks about numbers and cash-flow. Very objective metrics– not subjective opinions a.k.a “your emotions Vs mine”!
A lot of commoners might think that a particular startup “wins” because it has “superior technology”. Against this context, I agree with the authors because startup don’t win because they have the best technology. Rather, they win because they have the best design of cash-flow, cost and revenue.
If the business model by design can ensure that, for instance, marginal revenue is high and marginal cost is low or close to zero, then this is innovative by definition and the startup can stand a chance of being the first scaler.
This is BY OBJECTIVE DESIGN, not BY BRUTE FORCE, EFFORT OR SUBJECTIVE OPINIONS/ EMOTIONS.
(haha sorry for the caps, I just got triggered).
The corollary is true, that–
The Number One Growth Limiter: Lack Of Product-Market Fit
QUOTE: “Product/market fit enables rapid growth, while the lack of it makes growth expensive and difficult. The concept of product/market fit originates in Marc Andreessen’s seminal blog post “The Only Thing That Matters.”
In his essay, Andreessen argues that the most important factor in successful start-ups is the combination of market and product. His definition couldn’t be simpler: “Product/market fit means being in a good market with a product that can satisfy that market.”
Without product/market fit, it’s impossible to grow a start-up into a successful business. As Andreessen notes,
“You see a surprising number of really well-run start-ups that have all aspects of operations completely buttoned down, HR policies in place, great sales model, thoroughly thought-through marketing plan, great interview processes, outstanding catered food, 30” monitors for all the programmers, top tier VCs on the board—heading straight off a cliff due to not ever finding product/market fit.”
Once again, here it speaks of cashflow/ revenue as a main determinant of whether a startup is serving a market need.
- “Follow the money” and we will almost always get a market need.
- In the event that something is “free”, the metrics that should be measured is the size of the network captured and any possible coefficient to the network effect.
First Mover Advantage Vs First Scaler Advantage
Another very interesting distinction in his book is the difference between first mover advantage and first scaler advantage. In the 1990s Nokia dominated the cell phone market, but soon market conditions change and the first scaler wins.
This brings to mind another point on originality, copying and…the ego. The point here is that originality–something that is linked to the first mover advantage– has almost always nothing to do with whether a startup eventually survives or not. The key here is the first scaler advantage and the network effect.
You can be a first mover (think Friendster) and still get wiped out by the first scaler (Facebook). The key is really in scaling after the innovative business model is in place!
QUOTE: “Blitzscaling also requires a strong focus on risk management. While blitzscaling requires risk taking, it doesn’t require unnecessary risk taking. Indeed, the higher level of risk associated with blitzscaling makes risk management even more valuable and important. As Yahoo! cofounder Jerry Yang told us in an interview for Reid’s Masters of Scale podcast, “All bold strategies have a risk. If you don’t see it, you’re flying risk-blind.” “
It is also worth noting that blitzscaling does not equate the reckless culture of spending money. Startups can spend millions of dollars without a proper sensible strategy, or simply without measuring their expenditure and/or ROI.
The key here is to manage risks internally through business model innovation, such that the risks is minimized as the business acquires a bigger network.
So, Where Do We Go From Here?
On a parting note, this is a really good book! There are so many lessons we can learn from this book especially when we are deciding on the metrics to measure when speed is the first priority, and uncertainty is the norm.
I probably need to reread this book at least three times, just like how I probably need to reread Robert Greene’s books at least 10 times, haha.
I hope you have enjoyed this review! And happy 2019!