Chapter 2
It’s a method for scaling up very fast.
Examples: Slack, Tencent, PayPal, many more.
The idea is to take risks going as fast as you can, if you know there is a big market out there to conquer. It doesn’t mean just haphazardly stepping on the gas though; you need to invest in future with high focus, but when you do, go ALL OUT.
The world is moving faster, and you need to outpace it.
Blitzscaling is prioritizing speed over efficiency in the face of uncertainty.
Being efficiënt is good to glide through the air, reducing uncertainty. As a start up, it means being frugal. You want to find PMF with efficiency.
Classic scaling up is growing efficiently. Fast scaling is sacrificing efficiency. Costs are still predictable.you do focus on likely achieving ROI and can get investment because banks and investors like this. You grow a more or less predictable ROI model very fast.
Blitzscaling means you are OK with sacrificing efficiency for speed. Without waiting to achieve certainty of whether the sacrifice will pay off.
Mind the scaling S curve: speed up, slow down, speed up. There is usually a stage of getting feedback you need to go through.
3 key techniques of Blitzscaling:
- Business model innovation. Design an innovative business model that can truly grow. So many companies focus on product, design, marketing. Everything BUT how the company is supposed to make money. You need tech nerds AND business nerds. You need to combine technologies in a way that makes your business thrive. Innovate through your business model, not only your product.
- Growth strategy: You need to grow as fast as possible, which involves huge risks, but gets you to market dominance. Think of referral payments PayPal offered, viral marketing and Uber doing discounts for every new city they enter. Focus on only winner take all - or lost - markets. Not others, those are not for Blitzscaling. Keep in mind technology innovation - often basis for scaling products and competitive advantage can be claimed by others this way too
- Management innovation
Business model: theories composed of assumptions about the business.
Four growth factors
- Market size (TAM) -> needs to be reachable. Note that VC needs to triple investments more or less.
- Network effects
- Distribution: a poor product with great distribution will almost always beat a great product with poor distribution. You need to be competitively good at product, user acquisition and business model development.
- High margins
Part 2:
Virality:
Use natural vitality (by providing value e.g PayPal forced people to sign up to receive money, LinkedIn and their contact import).
Also use incentivized vitality: Dropbox with free storage for every user you refer. PayPal with both referee and referee getting 10$.
Pay attention: like Dropbox you will have to investigate if your users are even able to use the product without guidance. Get user interviews in to keep optimizing your funnel.
Virality is often freemium.
Often times, a startup’s growth depends on high gross margins. This is very important to keep in mind with regards to the Book - The Innovator’s Dilemma where margin requirements limit innovation.
FB had 87% gross margin.
Network effect: product’s increased usage increases the value of the product for other users.
Categories of network effects:
NYU Arun Sundar Arazan (?)
- Direct network effects: direct increase in usage leads to direct increase in value. E.g FB, messaging like WA and WeChat
- Indirect network effects: Increase in uses leads to increase in complementary goods, leads to increase in value. E.g increase in Windows incentivizes software developers to build for the platform, and thus increases platform value
- Two sided network effects: increase in usage on one side, increases value for a different side of users e.g. Uber, Airbnb, EBay
- Local network effects: increase in usage by a small subset of users increases value for another user. E.g favorites that a user picks don’t pay.
- Compatibility and standards: increase in a platforms usage increases usage for compatible platforms / products. MS Word’s usage created the docx standard and fended off competition through its standard
Network effects make your product more sticky (link to lean analytics). Because the value for the person is interwoven with the product.
don’t imitate. Don’t do profiles because they cause network effects. Will fail.
You want to focus on the perceived value of your product. From Book Notes - Crossing the chasm, focus on niche markets.
Lots of companies have everything in place except PMF.
Focus on not obvious opportunities. Indeed I’ve used non-obvious great products often. They often get scaled fast.
Get networked intelligence; don’t just shoot and hope to hit bullseye. Talk actively to people in your network to validate your ideas.
WhatsApp had 500million monthly active users with 43 employees before acquisition by facebook.
try revenue / business models until you find the right one. Your product and business model aren’t the same thing. Innovate both.
Founder changes through stages
- Family; founder does everything
- Tribe: you maintain some code but don’t write yourself. Less tasks.
- Village: Difficult. Design the org. Big picture. Hire executives from outside. 100s of people.
- City: Big strategic decisions. Others work out implications. 1000s of people.
- Nation: new intrapreneur. New ideas and innovations.
Eight key transitions
- Family and tribe, Small to large teams
- Village and beyond: multiple larger teams (100s)
You can hire experienced executives by starting with a lower role e.g director of engineering and later make them CTO. Or something like this.
Scaling tactics as a C level to communicate with everyone:
- Realize startups aren’t natural environments and sometimes it’ll feel unnatural
- Chesky, from airbnb, sends a long email to the company every Sunday where he describes something he’s thinking about, that’s relevant for the whole company. It’s extra perspective, like an internal blog. Seems quite personal, as they mention employees get an understanding of who he is, and what matters to him.
- Breakfast with new employees
- Q&A with employees if you visit an office
- Videos and voice memo’s also work
If you don’t have customers listen to, listen to your gut. If you do, listen to data.
Create a growth team with their own engineers so that marketing team doesn’t compete with product roadmap.
Startups are like pirates; more risks, break rules, generally at risk of death.
When the new CEO of Uber redefined its cultural values, he did so firmly believing bottom up. He asked employees to send in suggestions on how to improve Uber’s culture and got over 1200 people doing so. They were voted on 22 times. That’s how it’s done.
Larry Page tried to let 400 people report to his VP Eng. that failed, and he later allowed Eric Schmidt to build a real organization.
LOSE THE EGO.
When thinking about a hire for a new role, don’t think in terms of an abstract product description, but think about it in terms of a person. Imagine the person filling the role.
Chief of staff amplifies business impact. Get a chief of staff.
In the beginning, find people able and willing to embrace the chaos. Chaos here does NOT mean complete disorder, but it means (potential a lot) less structured control processes, and most importantly change in responsibilities often.
Act swiftly and efficiently: you don’t have time for people to find their way. Also not for people to float around. You have to reinvent 3 times a year during blitzscale. Management will sometimes be bad. You don’t have time to do the bureaucratic things right. He admits PayPal was badly managed. They just went fast.
Bad management can give counterintuitive strengths. ‘Oh shit moments’ require crazy adaptation and traditional management practices make for stability (also good, but not now), not adaptability.
You jump from an airplane and assemble a parachute on the way down.
Priorities of fires to fight:
- Distribution
- Product
- Revenue model
- Operations
- Competition
- What’s next
Scale pain
Your system is often failing to cope with scale because you’re doing something right. If your system isn’t struggling with your growth, you’ve over engineered your system and underdeveloped your growth.
Sometimes, complaining customers are not the fire you need to focus on.
Don’t follow conventional wisdom. Follow Reason.
On managing funds:
Always raise more than you plan for. Then:
Act like you have half the amount of what you have in the bank. One half is for the plan, the other for when it fails. Because it will.
In a startup, never forget about culture. Culture is a shared way of doing things. It’s how people behave when there is no clear direction.
Culture is about repeating, over and over again, the things that matter for your company.
Culture is what remains after people leave. It’s what makes your company ‘itself’, regardless of the people. The founders are the core harbingers of culture.
If we want to preserve culture, we must continue to create it.
Netflix went public when they had 150 people.
Always have largely missionary for your culture. Allow some, but never too many, mercenaries.
Focus on sameness AND diversity. Hire people that are additive to your culture. Not based on superficial fit. Continue to build it.
Blitzscaling within larger organizations
You can do this by investing, acquiring or other means. In any case, the Blitzscaling operation should be separate from the main org - take inspiration from Book - The Innovator’s Dilemma
Watson, Kindle, Android, PlayStation Made their offices inaccessible for other employees to keep them separate
Blitz scaling beyond business
Only do it in a big market. Otherwise, don’t blitzscale
Obama campaign
- He targeted small donors since Hillary had strong ties with larger ones. Raised 650M which is 300M more than previous record
- Set up Obama social network that helped supporters connect and matched them with undecided voters to help them connect and talk. Also people in the network organized hundreds of events and raised 30M dollars
- Voteforchange
in a blitzscaling environment, capital is likely cheap and acquisitions likely very expensive
Options when you’re the incumbent: beat them, join them, avoid them.
Response to systemic risk, they believe, falls in roughly four categories:
- Take decisive action now (stop the presses response) e.g Airbnb guarantee of 50K when a host’s stuff got stolen and house got trashed in 201-. It was a systemic problem and he took decisive action. Also think of Binance and protecting users, compensating them.
- Take short term action now, but defer permanent action until later. PayPal and fraud; they initially took the costs themselves until they had built a better fraud detection system. Note: do this when you have a strategy for better later action. Don’t defer mindlessly.
- Note the problem now, but take action later. If it will become systemic in the future, you can’t ignore it but you don’t have to act yet, perhaps. Be prepared. Like PayPal did with illegal transactions - they deferred working on the problem since they knew their transaction volume was very low. Later, they jumped on it, aware of the issue already.
- Let it burn. Just leave it. Sometimes makes sense.
Balancing responsibility and velocity
- Culture
- Build diverse and inclusive network
- When going to village stage ask; what things, if I don’t fix them now, will become impossible to fix at scale? Focus on impossible, not difficult. Difficult might be ok for later.
Find a balance between morality and velocity.
Tackle responsibilities that come with (blitz) scale proactively and not reactively.
Conclusion
Change will happen. Blitzscaling is eating the world. Be prepared.
The world will also positively impact the world.