by Reid Hoffman and Chris Yeh |
Tim O’Reilly’s recent article, “The fundamental problem with Silicon Valley’s favorite growth strategy,” makes an impassioned argument that the ideas in our book, Blitzscaling, encourage entrepreneurs to behave in ways that are irresponsible or even dangerous in the pursuit of what he characterizes as “runaway growth.” Instead, he argues for the virtues of going slow and staying small.
O’Reilly has good intentions, but he’s wrong—both about blitzscaling and in his desire to turn back the clock.
There are times when small and slow is the right strategy for a specific market opportunity. But in today’s world, speed-to-scale entrepreneurship is what we need to improve society, transform industries, and create massive value for customers, employees, and investors. That’s what we call “blitzscaling”.
Take Amazon, for example. O’Reilly’s position resembles that of the ardent bibliophile who bemoans the loss of the corner bookshop. While this stance might seem appealing at first glance, blocking speed and scale for the sake of preserving the past is reactionary and counterproductive. If you broaden your lens to include all stakeholders, Amazon is clearly better for the world.
Customers value and benefit from the convenience, price, and selection of Amazon, which is why the company is, by a wide margin, America’s largest bookseller.
Publishers and authors (like O’Reilly and us) also benefit from Amazon’s success. 2018 set yet another all-time record for the number of paper books sold in the United States, as has been repeatedly true during the era of Amazon.
And from a financial perspective, any investor would be better off buying stock in Amazon than buying and share of a corner bookshop; if you invested $100 in Amazon’s 1997 initial public offering (IPO), those shares would have been worth about $120,000 in 2018.
Finally, and importantly, society is better off because Amazon makes the system for distributing books (and other products) vastly more productive, freeing up resources for other value-creating investments.
By and large, the only groups that actually prefer the corner bookshop to Amazon are the independent bookstore owners themselves (quite understandably) and those with the luxury of indulging in sentimental nostalgia.
Blitzscaling is not a reckless gamble; it is a calculated risk.
O’Reilly is not the only one to worry about the negative impact of scaling. Tim Wu’s recent book The Curse of Bigness, for example, argues that unrestrained scale concentrates too much power in too few hands. And, as the industrial revolution showed us, there are some real costs to scale.
However, we believe—ardently and passionately—that responsible scaling is one of the most powerful forces for making people better off, just like the industrial revolution eventually made the world a vastly better place. When the market conditions are right, you should blitzscale for the benefit of all stakeholders: customers, employees, investors, and society.
Our difference of opinion with O’Reilly boils down to four key points:
- Blitzscaling is a response to market dynamics, not the cause. In a connected world, someone will build an Amazon. The only question is who and how.
- Blitzscaling is a strategic technique for moving faster, not a reckless gamble. Entrepreneurs can and should blitzscale thoughtfully and responsibly.
- You don’t get to choose whether to have competition, just whether you play to win. Almost no one ever races unopposed.
- You can—and should—blitzscale responsibly. Speed and scale are generally good for the world; when the outcome is positive, the faster you get there, the better off all stakeholders are.
Taken together, these points help clarify why we believe in blitzscaling, but should also offer helpful guidance on when to deploy it, and how to shape its effects for good.
Blitzscaling is a response to market dynamics, not the cause
One of O’Reilly’s main criticisms of blitzscaling is that creates a winner-takes-most or winner-takes-all market. In our book, we describe these as Glengarry Glen Ross markets, in which the only truly valuable outcome is winning first prize. In the movie, this was a Cadillac:
“As you all know, first prize is a Cadillac Eldorado. Anybody wanna see second prize? Second prize’s a set of steak knives. Third prize is you’re fired.
O’Reilly describes this as a “dark pattern,” and argues that blitzscaling harmed the market for ride-hailing because “investors, awash in cheap capital, anointed the winners rather than letting the market decide who should succeed and who should fail.”
This is a fundamental misunderstanding of blitzscaling. Blitzscaling is a response to market dynamics, not their cause. Some markets are Glengarry Glen Ross markets, and some are not. Entrepreneurs and investors can’t transform a normal market into a Glengarry Glen Rossmarket, regardless of how they might want to do just that.
What makes this tricky is that markets evolve, and an innovative technology or business model can transform a normal market into a Glengarry Glen Ross market. Indeed, many great companies have been built by entrepreneurs who recognized that a technological change transformed the nature of an important market, enabling an innovative, blitzscalable business model. Microsoft and Apple believed that microprocessors would allow consumers to have their own computers. Amazon saw that the internet would change retail. And Apple used the capacitive touch screen to develop a new paradigm for computing.
Nowhere in our book do we recommend that all entrepreneurs blitzscale. In fact, we even have a section titled “Can I Choose Not To Blitzscale?” in which we state that “blitzscaling is not for everyone.” In the same year that Jeff Bezos founded Amazon, Thomas Keller launched The French Laundry restaurant. It’s a great business. It still serves just 60 customers per day.
O’Reilly’s article describes two businesses from his own career at O’Reilly—the Global Network Navigator (GNN) web portal, which he sold to AOL, and the Website web server, which eventually fell by the wayside. O’Reilly argues that both of these were blitzscaling opportunities that he believes O’Reilly was correct to pass on.
O’Reilly’s logic seems self-defeating. Imagine if he did blitzscale GNN and created the equivalent of Google years earlier—the value for society, customers, investors, and employees would be enormous, not to mention for O’Reilly himself.
Furthermore, O’Reilly’s own examples demonstrate the difference between a blitzscalable and non-blitzscalable market. Google realized that being the way to find the world’s information was a blitzscalable market, thanks to the network effects in its AdWords revenue engine. If O’Reilly had that same insight in 1995, it could have been an amazing blitzscaling opportunity. Nor would it have required O’Reilly to bet the company; many blitzscaling opportunities perform better as spin-offs or spin-outs. Not only does this protect the parent company and allow raising outside capital to fund growth, but the independence and focus increases the chances of success.
If you want to build a world-changing company, then the massive impact of successful blitzscaling is the technique to use.
On the other hand, web servers are not a blitzscalable market. O’Reilly points out that the Website web server was eclipsed by Netscape, which was in turn crushed by Microsoft—but that victory was short lived. Today, there is no one dominant player in web servers. Like any businesses, Netscape or Microsoft would have wanted web servers to become a Glengarry Glen Ross market, but neither could make that happen, despite their best efforts.
When we look at the broader trends, however, Glengarry Glen Rossmarkets are increasing. Thanks to the internet and other globalizing technologies, the entire world has entered the Networked Age. Markets for goods, services, and capital (both human and financial) are more liquid and global than ever before, and technology is becoming a core part of every industry. The result is that more and more markets are subject to forces like network effects that tend to produce winner-takes-most dynamics. Bookselling isn’t a winner-takes-most market—but blitzscaling the Kindle platform allowed Amazon to become the runaway leader in what has turned out to be a winner-takes-most market for ebooks (and allowed readers to get instant access to nearly any book they wanted).
In other words, it won the Cadillac.
If you don’t have the power to change the market dynamics (as is almost always the case), doesn’t it make sense to adopt the techniques that best fit them? Or to put it another way: If you owned a corner bookstore in 1997, would you be better off today if you had invested $10,000 in expanding your physical store—or in the Amazon IPO?
Blitzscaling is a strategic technique for moving faster, not a reckless gamble
Another class of criticisms that O’Reilly levels are based in his belief that blitzscaling is simply a matter of buying growth. For example, O’Reilly writes:
“Ironically, Hoffman and Yeh’s book is full of superb practical advice about innovation, execution, and strategic focus, but it’s wrapped in the flawed promise that start-ups can achieve similar market dominance as these storied companies by force-feeding inefficient growth.”
Elsewhere, O’Reilly asserts that the companies we cite in our book aren’t actually examples of blitzscaling:
“Each of these companies [Google, Facebook, Microsoft, Apple, and Amazon] achieved profitability (or in Amazon’s case, positive cash flow) long before its IPO, and growth wasn’t driven by a blitzkrieg of spending to acquire customers below cost, but by breakthrough products and services, and by strategic business model innovations that were rooted in a future that the competition didn’t yet understand. These companies didn’t blitzscale; they scaled sustainably.”
The implication is that blitzscaling ignores things like “business model innovations that were rooted in a future that the competition didn’t yet understand” in favor of “spending to acquire customers below cost.”
The truth is, we actually agree with O’Reilly about the importance of innovation. In fact, the entire second chapter of Blitzscaling is titled “Business Model Innovation,” and focuses on explaining why the simplistic dot-com philosophy of “get big fast” usually doesn’t work. In it we explicitly state:
“The real value creation comes when innovative technology enables innovative products and services with innovative business models….What sets companies like Amazon, Google, and Facebook apart, even from other successful high-tech companies, is that they have consistently been able to design and execute business models with characteristics that allow them to quickly achieve massive scale and sustainable competitive advantage.”
Blitzscaling is not a reckless gamble; it is a calculated risk that should be taken when the market dynamics make it the best strategy to win that market. We define it as the pursuit of rapid growth by prioritizing speed over efficiency in the face of uncertainty, not “lose money and make it up in volume.”
Every successful company’s long-term goal is to build a sustainable business. But sometimes the fastest path to sustainable market leadership involves pursuing a strategy that is unprofitable in the short term in order to reach a position that is more profitable in the long term. In a Glengarry Glen Ross market, the greatest risk is often not taking enough risk, since all the capital efficiency in the world won’t help if a competitor achieves enduring market leadership.
O’Reilly unwittingly illustrates this point by telling the story of Sunil Paul, a friend and a successful serial entrepreneur who filed a patent on the core elements of GPS-enabled ride-hailing in 2000. The founder of early internet startup Freeloader (acquired for $38 million in 1996) and anti-spam company Brightmail (acquired for $370 million in 2004), Paul went on to pioneer the ride-hailing space. Yet despite literally patenting ride-hailing in 2000, his own venture, Sidecar, lost out to the more aggressive scaling of Uber and Lyft.
Sometimes the fastest path to sustainable market leadership involves pursuing a strategy that is unprofitable in the short term.
Paul’s track record as a serial entrepreneur was far more impressive than either Uber co-founder Travis Kalanick or Lyft co-founder Logan Green. He also had backing from well-known venture capital investors like Union Square Ventures, Lightspeed Venture Partners, Google Ventures, and even Richard Branson. In a vacuum, who wouldn’t bet on the successful multi-millionaire serial entrepreneur with blue-chip backers and a patent on the entire concept of the industry? And yet Uber and Lyft are the market leaders, with a combined 98% of the US market, while Sidecar shut down in 2015.
The difference? Uber and Lyft blitzscaled. Sidecar didn’t.
To blitzscale successfully, you need a successful business model. But being right isn’t enough, as Paul’s example demonstrates. If you develop a successful business model but don’t scale, someone else will eventually copy that model, scale, and drive you out of business.
O’Reilly’s conclusion is that blitzscaling is bad because it allowed Uber and Lyft to win the ride-hailing market, rather than Paul, the original inventor of the concept. Our conclusion is that Paul’s example demonstrates that while you can build successful companies without blitzscaling (e.g., Freeloader and Brightmail), to win a Glengarry Glen Ross market like ride-hailing, you need a tight focus on speed, regardless of how experienced and qualified the entrepreneur.
This begs the billion-dollar question, how can you tell if a market is blitzscalable?
The “Business Model Innovation” chapter of Blitzscaling provides our answer, by delineating the four key growth factors and two key growth limiters that entrepreneurs and investors can use to assess blitzscalability.
- The first key growth factor is a big market. Blitzscaling is all about scale, which means a blitzscaling opportunity needs a lot of headroom to grow. For example, Amazon’s market is, well, everything. Plenty of headroom there!
- The second is distribution—the ability to get product into the hands of customers. If the key to success is achieving critical scale, massive distribution is essential. Dropbox made a great file-sharing product, for instance, but it was their viral marketing campaign that allowed them to cheaply acquire millions of customers.
- The third is high gross margins. In other words, what percentage of sales are available to pay for growth, and to reward investors for financing that growth. Some blitzscaling companies might deliberately price their products lower, making their actual gross margins significantly less than their potential gross margins. Amazon has done this over and over, even in its highly profitable Amazon Web Service business. But this should be viewed as a temporary tactic, not a long-term sustainable business model.
- The fourth are network effects (or some other source of long-term competitive advantage). Network effects occur when each new node you add to a network (say, each new home that’s added to Airbnb) increases the value of that network to the other nodes. Businesses with strong network effects such as eBay (which has networks of both buyers and sellers) can build enduring market leadership that lasts years or even decades.
But possessing the key growth factors is not enough to make a company blitzscalable, because the presence of the growth limiters can block sustainable growth. There are two main hurdles that need to be considered.
- The first key growth limiter is a lack of product-market fit. Product-market fit, as defined by Stanford’s Steve Blank, occurs when a product’s features are a strong fit with its market’s needs, as measured by a combination of usage, retention, and sales. Companies like Groupon that grow rapidly, but whose core products are not compelling to customers, can’t successfully blitzscale because they can’t retain those customers long enough to build long-term value.
- The second is a lack of operational scalability. There is no such thing as a company that generates billions of dollars of revenue with a team of less than 10 people. Blitzscaling requires building a substantial organization at an abnormally rapid pace. Traditional companies might grow 10% per year; blitzscaling companies might grow 10% per month or even per week.
Sunil Paul’s company Brightmail is a great example of a good business that wasn’t blitzscalable. Brightmail did well on distribution, where it struck up partnerships with many leading internet service providers (ISPs), and also had decent gross margins. But it lacked the requisite market size and network effects to be a blitzscaling opportunity: The market for spam-filtering technology was limited to a relatively small group of ISPs and therefore didn’t represent a multibillion-dollar opportunity.
Blitzscaling works when being the first company to achieve critical scale produces enduring leadership in a massively valuable market. When those conditions aren’t met, attempting to blitzscale is simply a good way to waste your time and energy—and investor capital.
You don’t get to choose whether to have competition, just whether you play to win
In his piece, O’Reilly defines an implicit distinction between what he characterizes as organic and inorganic market development. He writes of the ride-hailing market:
“Would a market that grew more organically—like the web, e-commerce, smartphones, or mobile mapping services—have created more value over the long term?”
Ironically, these four markets are, in fact, the province of blitzscalers. Google’s Chrome is the preeminent web browser, Amazon is the preeminent e-commerce option, Google and Apple are the leaders in smartphone operating systems (except in China, where Chinese blitzscalers like Xiaomi hold sway), and Google operates the leading mobile mapping services.
As an individual entrepreneur, you might prefer a world without competition, but the rest of the world is better off when competition occurs. Competition drives better products and services, lower prices, and people taking risks to innovate. But it also means that people have to compete, which may feel stressful and force you out of your comfort zone. It may not seem fair, but if you choose not to compete for leadership in a Glengarry Glen Ross market, you’re choosing to lose.
In the book, we detail the story of how Airbnb responded when Rocket Internet, an internet-venture builder founded by the German Samwer brothers, created a European clone of the service called Wimdu. Airbnb was a small 40-person company at the time, and Wimdu, raised close to $100 million, hired 400 employees, and opened 20 offices. Then Rocket Internet offered to sell Wimdu to Airbnb for a 25% stake in Airbnb. (I [Reid] remember when Airbnb co-founder Brian Chesky told me about the offer.)
When you’re forced to outsprint a capable competitor, you can achieve your goals more quickly than you ever imagined.
Groupon’s co-founder and then-CEO Andrew Mason advised Brian to take the deal. “They’ll probably kill you,” he said.
Do you think Airbnb wanted that kind of competition? Of course not. But unless Airbnb agreed to a merger, it had only two options. One, it could rise to the challenge and compete by launching its own blitzscaling effort. Or two, it could insist on “organic” growth and lose, thus fulfilling Mason’s prediction.
Airbnb chose to compete, raising its own war chest of $112 million and opening nine offices around the world in less than a year. It was stressful and uncomfortable, but it worked. Airbnb’s bookings increased by a factor of 10 during that time, and it left Wimdu in the rear-view mirror. In 2018, Wimdu shut down, while a now-profitable Airbnb was one of the world’s most valuable startups.
“The Samwers gave us a gift,” Chesky admitted many years later in the Blitzscaling class we taught at Stanford University in 2015. “They forced us to scale faster than we ever would have.”
That’s the upside of competition. When you’re forced to outsprint a capable competitor, you can achieve your goals more quickly than you ever imagined, creating more value than you ever imagined—and not just for the founders and employees, but for customers and other stakeholders, too.
You can—and should—blitzscale responsibly
O’Reilly’s final criticism centers around his belief that what he calls “runaway growth” is bad for the world. O’Reilly erroneously believes that Blitzscaling ignores the question of responsibility. He writes:
I’ve talked so far mainly about the investment distortions that blitzscaling introduces. But there is another point that I wish Hoffman and Yeh had made in their book.
Assume for a moment that blitzscaling is indeed a recipe for companies to achieve the kind of market dominance that has been achieved by Apple, Amazon, Facebook, Microsoft, and Google. Assume that technology is often a winner-takes-all market, and that blitzscaling is indeed a powerful tool in the arsenal of those in pursuit of the win.
What is the responsibility of the winners? And what happens to those who don’t win?
We stand with O’Reilly in this call for responsible scaling. We completely agree that the blitzscalers who win their markets have a moral obligation to those markets and their associated stakeholders. That is precisely why we leave the reader with this message in the final chapter in the book, “Responsible Blitzscaling.”
This passage from that chapter speaks directly to the need for responsibility, both morally and practically:
“We believe that the responsibilities of a blitzscaler go beyond simply maximizing shareholder value while obeying the law; you are also responsible for how the actions of your business impact the larger society. But even beyond the moral imperatives, responsible blitzscaling is good business strategy. Society provides the ecosystem in which you live, and in which your businesses operate, which means that it can rightly claim some responsibility for your success. In other words, your success is contingent upon society functioning properly. Here in Silicon Valley, some might fantasize about floating cities in international waters, but the fact is that our successes rely on the rule of law, robust financial markets, and an education system that produces talented employees and a healthy market of consumers.”
To ensure that this concept spreads as broadly as possible, we are publishing the chapter on responsible blitzscaling in full so that even those who don’t have the book can freely access it. You can find it here.
To blitzscale, or not to blitzscale?
There are many legitimate reasons not to blitzscale.
To start with, the chance of failure is high—as it is for any startup. As O’Reilly points out, the venture-capital model is a “home run” model, where most investments fail and the massive scale and impact of the few successes makes the model work. This means that the chance of success for any individual entrepreneur, even those who are blitzscaling, is small.
Thus, if your main goal is to operate a successful business for decades (or even generations), provide good products to your customers, and make a good living for you and your employees, then you should follow O’Reilly’s advice. That is a laudable and time-honored achievement.
O’Reilly cites a number of these successfully bootstrapped businesses in his piece, including Mailchimp, Atlassian, Shutterstock, Basecamp, and RXBAR. All of these are great businesses with happy customers. All of their founders and employees have done well. Combined, they have under 8,000 employees (as measured on LinkedIn), and a market capitalization of just about $30 billion.
Spot the difference? If you want to build a good business that carves out a profitable niche and provides a good living for you and your employees, then O’Reilly’s organic growth approach can be the right way to go. But if you want to build a world-changing company, then the massive impact of successful blitzscaling is the technique to use.
Of course, not everyone is interested in this kind of paradigm-shifting scale. There are some who believe that the past they see in their imaginations was better than today’s world, and who want to roll back the clock and minimize change. But we believe that the world is far from perfect, and could use a stiff dose of positive change. Another word for that is progress.
The ride-hailing market is a perfect illustration of this. O’Reilly criticizes Uber and Lyft for unsustainably blitzscaling without creating a profitable business model. In Lyft’s recent S-1 filing (the precursor for their upcoming IPO), they even admit that “We have a history of net losses and we may not be able to achieve or maintain profitability in the future.”
But we’re still early in the long game—and maybe the goal is less profit now in order to earn more profit later. These losses have helped Uber and Lyft transform the transportation market for the better. In New York City, ride-hailing went from being negligible in 2014 to over 15 million rides per month by the end of 2017. Over that same time period, taxi rides declined from 15 million rides per month to 10 million rides per month. Blitzscaling transformed this entire industry in about four years, and made consumers far better off: Economists from Uber, the University of Chicago, and Oxford estimated that in 2015, Uber generated nearly $7 billion in benefits to consumers in the United States.
But this is just the beginning. To truly be responsible blitzscalers, Uber and Lyft will need to become sustainable, profitable businesses that make drivers, riders, and their cities better off, not just their shareholders.
If you believe the future will be better than the past, blitzscaling is heartening, because we’ll get there faster.
We acknowledge that most change is difficult, and that even when it’s positive overall, it can have negative effects on some. When change occurs at the extreme speed of blitzscaling, it’s even harder for those affected to make the necessary adjustments. That’s why it’s critical that all of us, including the blitzscalers, help society through these transitions. (For example, I [Reid] support Byron Auguste’s Opportunity@Work, because it is addressing the disruption that blitzscaling can bring by expanding access to career opportunities so that all Americans can work, learn, and earn to their full potential.)
Blitzscaling is an incredibly powerful social tool. One of the reasons we wrote our book was to make sure that this tool is available to a broad range of responsible blitzscalers, not just those who match the profile that O’Reilly describes as the prototypical “hyper-aggressive entrepreneur who raised money faster, broke the rules more aggressively, and cut the most corners in the race to the top.”
But making the ideas of blitzscaling broadly available isn’t enough. As a society, we need to rein in irresponsible blitzscaling while protecting companies that blitzscale for good. The best response to the potential negative fallout of speed and scale is to search for ways to apply guardrails to the highway, not to mourn the loss of local dirt roads. That means the public and private sector need to work together to develop legislation and regulation for new fields like autonomous vehicles and cryptocurrencies, not introduce outright bans.
Blitzscaling is one of the modern tools for building the technology companies of the future. And since all companies are becoming technology companies, and since more markets are becoming Glengarry Glen Ross markets, blitzscaling is likely to play an even larger role in the future.
We’d like to close with the final words of Blitzscaling, which sum up why we believe blitzscaling has so much potential to make our world better:
If you believe the future will be better than the past, blitzscaling is heartening, because we’ll get there faster. If you believe that the future will be worse than the past, blitzscaling is terrifying, because it overturns the existing order faster.
Here is how we personally feel about blitzscaling:
We believe that the future can and should be better than the past, and that it’s worth tolerating the discomfort we feel when blitzscaling to get to the future as quickly as we can.
We hope to see blitzscaling enable more entrepreneurs to build transformative companies and succeed at a massive scale.
We hope to see more established companies leveraging the lessons of blitzscaling to be more adaptable and better equipped to tackle the challenges of the future.
We hope to see activists and governments use the tools of blitzscaling to change the world for the better.
The companies that choose to blitzscale will soon set the pace of progress in every industry. It’s up to you to lead this change— for yourself, for your company, and for society as a whole.
Race you to the future.
This article is part of Quartz Ideas, Quartz's home for bold arguments and big thinkers.