Blitzscaling. Reid Hoffman
discuss, operational scalability is one of the primary growth limiters that scale-ups need to address. When a business can grow users, customers, and revenues faster than the number of employees without collapsing under the weight of its own growth, the business can achieve greater profitability and keep growing without being as tightly constrained by the need for financial or human capital. In contrast, when the number of employees grows faster than users, customers, and revenues, it’s a major red flag that could indicate issues with the fundamental business model.
Nevertheless, for the sake of simplicity, this book will typically define the stage of a company by its organizational scale. A Family-stage company will have one to nine employees, a Tribe-stage company will have ten to ninety-nine employees, and so on. When exceptions arise, we’ll specifically call them out to avoid confusion.
THE THREE KEY TECHNIQUES OF BLITZSCALING
Through much study of, direct access to, and conversation with the leadership at companies such as Google, Amazon, and Facebook—and through my own experiences as an entrepreneur and an investor—we’ve been able to identify the three key techniques applied by entrepreneurs and investors to build dominant companies. These basic principles do not depend on geography and can be adapted to build great companies in any ecosystem, albeit with varying degrees of difficulty.
TECHNIQUE #1: BUSINESS MODEL INNOVATION
The first technique of blitzscaling is to design an innovative business model that can truly grow. This sounds like a Start-ups 101–level insight, but it’s astounding how many founders miss this key element. 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.
As the world has gone digital, business model innovation has become even more important. So many technologies are available as services, which are on demand and built to be integrated, that technology is no longer as strong a differentiator, while figuring out the right combinations of services to bring together into a breakthrough product has become a major differentiator. Most of today’s successful companies are more like Tesla, which combines a set of technologies that already existed, rather than SpaceX, which had to pioneer new ones.
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 outexecuting 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. Uber wasn’t the first company to try to improve the experience of hailing a taxi. But prior to the technological innovation of the smartphone, complete with wireless Internet connection and GPS-enabled location-based services, Uber’s business model simply wouldn’t have worked. These innovations reduced the friction for both driver and rider, making Uber’s core UberX ridesharing model a mass-market possibility for the first time.
Nor can companies afford to ignore technology innovation after they successfully blitzscale their way to City or Nation stage. Each and every one of the technology companies worth over $100 billion has used technology leadership to reinforce its competitive advantages. 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.
Technology innovation is a key factor in retaining the gains produced by business model innovation. After all, if one technology innovation can create a new market, another technology innovation can render it obsolete, seemingly overnight. While Uber has achieved massive scale, the greatest threat to its future doesn’t come in the form of direct competitors like Didi Chuxing, though these are formidable threats. The greatest threat to Uber’s business is the technology innovation of autonomous vehicles, which could make obsolete one of Uber’s biggest competitive advantages—its carefully cultivated network of drivers—essentially overnight.
The key is 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.
Ideally, you design your business model innovation before you start your company. This is what happened when I cofounded LinkedIn. The key business model innovations for LinkedIn, including the two-way nature of the relationships and filling professionals’ need for a business-oriented online identity, didn’t just happen organically. They were the result of much thought and reflection, and I drew on the experiences I had when founding SocialNet, one of the first online social networks, nearly a decade before the creation of LinkedIn. But life isn’t always so neat. Many companies, even famous and successful ones, have to develop their business model innovation after they have already commenced operations.
PayPal didn’t have a business model when it began operations (I was a key member of the PayPal executive team). We were growing exponentially, at 5 percent per day, and we were losing money on every single transaction we processed. 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. (We’ll discuss the power and importance of this kind of viral marketing later on.)
The insanity, in fact, was that we were allowing our users to accept credit card payments, sticking PayPal with the cost of paying 3 percent of each transaction to the credit card processors, while charging our users nothing. I remember once telling my old college friend and PayPal cofounder/CEO Peter Thiel, “Peter, if you and I were standing on the roof of our office and throwing stacks of hundred-dollar bills off the edge as fast as our arms could go, we still wouldn’t be losing money as quickly as we are right now.” We ended up solving the problem by charging businesses to accept payments, much as the credit card processors did, but funding those payments using automated clearinghouse (ACH) bank transactions, which cost a fraction of the charges associated with the credit card networks. But if we had waited until we had solved this problem before blitzscaling, I suspect we wouldn’t have become the market leader.
TECHNIQUE #2: STRATEGY INNOVATION
The most obvious element of blitzscaling is the pursuit of extreme growth, which, when combined with an innovative business model, can generate massive value and long-term competitive advantage. Many start-ups believe they are pursuing a strategy of extreme growth, when in fact they