Hoffman goes into incredible detail on how to achieve scale in the tech business, presenting a set of techniques for driving and managing extremely rapid growth.
The key to rapidly building massive businesses in today’s environment is the aggressive growth strategy of blitzscaling.
The speed of the internet has generated a number of second-order effects that have changed how businesses and organisations can grow.
But perhaps the most important impact for businesses has been the rising significance and prevalence of so-called network effects that occur when increased usage of a product or service boosts the value of that product or service for other users. For example, each additional Airbnb host makes the service a tiny bit more valuable for every other Airbnb guest and vice versa.
What is Blitzscaling
When you blitzscale, you deliberately make decisions and commit to them even though your confidence level is substantially lower than 100 percent. You accept the risk of making the wrong decision and willingly pay the cost of significant operating inefficiencies in exchange for the ability to move faster.
My friend Marc Andreessen has argued that “software is eating the world.” What he means is that even industries that focus on physical products (atoms) are integrating with software (bits).
- e.g. Tesla makes cars (atoms), but a software update (bits) can upgrade the acceleration of those cars and add an autopilot overnight.
Blitzscaling means that you’re willing to sacrifice efficiency for speed, but without waiting to achieve certainty on whether the sacrifice will pay off.
The canonical sequence that companies like Google and Facebook have gone through begins with classic start-up growth while establishing product/market fit, then shifts into blitzscaling to achieve critical mass and/or market dominance ahead of the competition, then relaxes down to fastscaling as the business matures, and finally downshifts to classic scale-up growth when the company is an established industry leader.
Together, this sequence of scaling generates a classic “S-curve” of growth, with slower initial growth followed by rapid acceleration, eventually easing its way into a gentle plateau.
The Three Basics of Blitzscaling
1. Blitzscaling is both an offensive strategy and a defensive strategy.
- Offensive: you can take the market by surprise and leverage your lead to build long-term competitive advantages before other players are able to respond.
- Defensive: blitzscaling lets you set a pace that keeps your competitors gasping simply to keep up,
2. Blitzscaling thrives on positive feedback loops, in that the company that grows to scale first reaps significant competitive advantages.
- 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 recognise its leadership, and both talent and capital flood in.
3. Despite it's incredible advantages and potential payoffs, blitzscaling also comes with massive risks.
- 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.
The Five stages of Blitzscaling
- Stage 1 (Family) 1–9 employees
- Stage 2 (Tribe) 10s of employees
- Stage 3 (Village) 100s of employees
- Stage 4 (City) 1000s of employees
- Stage 5 (Nation) 10000s of employees
Some of the other measures of scale include the number of users (user scale), the number of customers (customer scale), and total annual revenues (business scale).
The Three Key Techniques of Blitzscaling
Technique 1: Business Model Innovation
- By “business” we simply mean how the company makes money by acquiring and serving its customers.
- The key: to combine new technologies with effective distribution to potential customers, a scalable and high-margin revenue model, and an approach that allows you to serve those customers given your probable resource constraints.
Technique 2: Strategy Innovation
- To achieve your goals, you have to know what you plan to do and, just as important, what you plan not to do.
- For successful blitzscaling, the competitive advantage comes from the growth factors built into the business model, such as network effects, whereby the first company to achieve critical scale triggers a feedback loop that allows it to dominate a winner-take-all or winner-take-most market and achieve a lasting first-scaler advantage.
- e.g. Reducing ticket prices 90 percent to get to one million visitors faster—knowing that those one million visitors were networked to ten million more.
- Because blitzscaling often requires spending significant amounts of capital in ways that traditional business wisdom would consider “wasteful,” implementing a financial strategy that supports this aggressive spending is a critical part of blitzscaling.
Technique 3: Management Innovation
- As we will discuss in more detail later in the book, companies that blitzscale have to rapidly navigate a set of key transitions as their organisations grow, and have to embrace counterintuitive rules like hiring “good enough” people, launching flawed and imperfect products, letting fires burn, and ignoring angry customers.
Business Model Innovation
Designing to Maximise Growth: The Four Growth Factors
A company’s business model describes how it generates financial returns by producing, selling, and supporting its products.
If you want to find your best business model, you should try to design one that maximises four key growth factors and minimises two key growth limiters.
#1: Market Size
Given the desire for home runs like eBay, most venture capitalists filter investment opportunities based on market size. If a company can’t achieve “venture scale” (generally, a market of at least $1 billion in annual sales), then most VCs won’t invest, even if it is a good business.
A good product with great distribution will almost always beat a great product with poor distribution.
You have to be good at building a product, then you have to be just as good at getting users, then you have to be just as good at building a business model.
These distribution techniques fall into two general categories: leveraging existing networks and virality.
- Leveraging Existing Networks — find creative ways to tap into existing networks to distribute their products.
- Virality — can either be organic or incentivised by some kind of reward. Almost always requires a product that is either free or freemium (e.g. Dropbox)
#3: High Gross Margins
The higher the gross margin, the more valuable each dollar of sales is to the company because it means that for each dollar of sales, the company has more cash available to fund growth and expansion.
It’s not necessarily any easier to sell a low-margin product than a high-margin product. If possible then, a company should design a high-gross-margin business model.
#4: Network Effects
A product or service is subject to positive network effects when increased usage by any user increases the value of the product or service for other users.
Five Categories of Network Effects (NYU professor Arun Sundararajan): direct network effects, indirect network effects, two-sided network effects, local network effects, compatibility and standards.
When you design your business model to leverage network effects, you can succeed anywhere.
Designing to Maximise Growth: The Two Growth Limiters
A key component of business model innovation is designing around these growth limiters.
Growth Limiter #1: Lack of Product/Market Fit
Product/market fit means being in a good market with a product that can satisfy that market.
The only way to truly prove product/market fit is to get the product into the hands of real users.
Growth Limiter #2: Operational Scalability
Designing a scalable economic model isn’t enough if you can’t scale up your operations to meet demand.
Proven Business Model Patterns
1. Bits Rather Than Atoms (see Why Software Is Eating The World)
3. Free or Freemium
- The free product acts as a tool for discovery and gaining a critical mass of users, while the paid version of the software allows the business to extract value from those users once its value is clear.
4. Market Places
- Online marketplaces tap a global market.
- By connecting buyers and sellers instead of holding inventory or managing logistics (and thus dealing in bits rather than atoms), online marketplaces avoid many of the growth limits of human or infrastructure scalability.
6. Digital Goods
- e.g. in-app purchases
- In addition to enjoying the advantages of any bits-based business, digital goods tend to have nearly 100 percent gross margins, since they are purely digital and usually do not add significantly to infrastructure or overhead costs.
7. Feeds (e.g. Facebook, Twitter, Instagram)
- So powerful that Twitter, whose product is essentially one long news feed, is still an important Internet company despite barely changing its product in nearly a decade.
The Underlying Principles of Business Model Innovation
1. Moore's Law
- Computing power tends to double every eighteen months.
- If they have the ability to perform a task (which is a big if), computers are almost always faster, cheaper, and more reliable than human beings.
3. Adaption, Not Optimisation
- e.g. Amazon expanded into new markets like AWS rather than simply honing its retail capabilities
- e.g. Facebook has been able to adapt to the shift from a text-based social network accessed via desktop Web browsers to an image/video based social network accessed via smartphones.
4. The Contrarian Principle
- Being contrarian is often critical to the process of creating a massively valuable technology company.
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.
To achieve massive success, you need to have a big new opportunity—one where the market size and gross margins intersect to create enormous potential value, and there isn’t a dominant market leader or oligopoly.
Some big opportunities are so enormous that they spawn secondary opportunities for blitzscaling.
Facebook’s rise created the platform for Zynga’s initial growth,
It’s important not to confuse critical mass with first-mover advantage. Being first to launch in a market might earn you congratulations on being a product visionary, but if you aren’t also the first to scale, you’ll end up as a footnote in a Wikipedia article about your competitor who did.
It’s doing things that other companies normally don’t do, or choosing not to do things that they do because you’re willing to tolerate greater uncertainty or lesser efficiency.
Blitzscaling is Iterative
Blitzscaling extends the simple three-step process of “Do Things That Don’t Scale” as follows:
- Step 1: Do things that don’t scale.
- Step 2: Reach the next stage of blitzscaling.
- Step 3: Figure out how to do one set of things that scale, while somehow also finding a way to do a completely different set of things that don’t scale.
- Step 4: Reach the next stage of blitzscaling.
- Step 5: Repeat over and over until you reach complete market dominance.
One of the key features that sets global giants apart from those companies that flame out or implode before they can reach market dominance is an ability to evolve and optimise their management practices at each stage of growth.
Eight Key Transitions
1. Small teams to large teams
- At the Family stage, it’s often the case that every member of the team is involved in every major decision. At the Village stage and beyond, this is nearly impossible.
- The answer is not to involve those employees in every decision—that would be inappropriate and logistically impossible. Rather, create other systems to help them feel connected to the company’s mission.
2. Generalists to specialists
- As the company grows, it needs to shift to hiring specialists who are less fungible but have expertise in an area that is crucial to scaling the organisation.
3. Contributors to managers
- While entrepreneurs often resist creating a hierarchy by classifying their people into executives, managers, and contributors, this kind of formal structure is essential to growth.
4. Dialogue to broadcasting
- At the Village stage, the company likely exceeds Dunbar’s number (the number of individuals with whom any one person can maintain stable relationships), and the founder simply won’t have time to meet one on one with every employee with any reasonable frequency.
5. Inspiration to data
- What matters isn’t what you collect but what you convey to decision makers.
- Watch out for what Eric Ries dubbed “vanity metrics”—numbers that present a rosy picture of the business but don’t actually reflect its key drivers of growth.
6. Single focus to multithreading
- What we mean by this is that start-ups in the early stages of blitzscaling are generally single-product companies that focus on doing one thing extremely well.
- But to keep the company growing in the later stages, scale-ups need to manage multiple product lines or even business units.
7. Pirate to navy
- This key transition is the shift from playing offense to playing offense and defense at the same time.
- You may order your naval task forces to launch diversionary attacks that yield little tactical advantage but that help the overall strategic situation.
- e.g. 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.
8. Scaling yourself: Founder to leader
- There are only three ways to scale yourself: delegation, amplification, and just plain making yourself better.
Nine Counterintuitive Rules
To succeed, you’ll have to violate many of the management “rules” that are designed for efficiency and risk minimisation.
- Embrace chaos — entrepreneurs should always have a Plan A, a Plan B, and a Plan Z.
- Hire Ms. Right Now not Ms. Right — e.g. a great designer might excel running a one-woman show at a Family or a Tribe, but be less effective working as part of a larger design team.
- Tolerate "bad" management
- Launch a product that embarrasses you — if you need to choose between getting to market quickly with an imperfect product or getting to market slowly with a “perfect” product, choose the imperfect product nearly every time.
- Let fires burn — which fires do you have the ability to extinguish right now, and which will be easier to extinguish later (and vice versa)?
- Do things that don't scale (throwaway work)
- Ignore your customers
- Raise too much money — "excess” cash allows you to better account for the unforeseeable—and the only thing that’s foreseeable about blitzscaling is that you will at some point encounter the unforeseeable.
- Evolve your culture — 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.
Defending Against Blitzscaling
OPTION #1: beat them - continue to play your traditional game.
OPTION #2: join them
OPTION #3: avoid them - cede the current market to blitzscalers and use your current assets to migrate to a new, less vulnerable market.
Here’s what all of us need to realise about the Blitzscaling Era: Speed and uncertainty are the new stability.
Be an infinite learner. The best and worst thing about the rapid pace of change today is that there are no experts with ten-plus years of experience in any emerging phenomenon.
If you’re able to climb the learning curve faster than others, you have the opportunity to create massive value from it.
The landscape is always changing, and learning is how you adapt.
Be a first responder. As new technologies and trends emerge, the uncertainty of where they are headed will paralyse many people and keep them from acting. Those who are willing to act—and act quickly—despite the uncertainty will have a disproportionate advantage.