Is blitzscaling an exception in hindsight?

Eddy de Heij recommended “Blitzscaling, The Lightning-Fast Path to Building Massively Valuable Companies”

Studying the exceptions and making it into a model?

After reading the first chapter, I send him an e-mail:

Hi Eddy,

Just finished the first chapter. The book sets a lot of conditions:

* Access to risk capital from VCs with huge risk appetite

* Acces to a talent pool

* A business model with a network effect

* Experienced management team

* Already at considerable scale

That is a very small pool to fish in. Will reserve judgement until I finish the full book, but it smells like a book studying the exceptions in hindsight and making that into a “model”.

PS Have just finished ”The four” and nearly becoming allergic to winner takes all. 

Kind regards,

Ron

Winner takes all

There is no doubt, that in a world where currently, winner takes all, you need to blitzscale. If you don’t, someone else will. Particularly in markets and products with a network effect. Network effects that occur when increased usage of a product or service boosts the value of that product or service for other users.

Blitzscaling is a red queen race

In Lewis Carroll’s classic book Through the Looking-Glass, the Red Queen tells Alice, “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

Blitzscaling and first scaler advantage

Blitzscaling drives “lightning” growth by prioritising speed over efficiency, If you’re willing to accept the risks of blitzscaling when others aren’t, you’ll be able to move faster than they will. Creating a “first-scaler advantage.”

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 requirements

Blitzscaling requires more than just courage and skill on the part of the entrepreneur. It also requires an environment that is willing to finance intelligent risks with both financial capital and human capital, which are the essential ingredients for blitzscaling.

The stages

There are five stages in blitzscaling, family, tribe, village, city and nation. Each has different challenges. Would love to say playbook, but it is too random to apply set rules. If you want a playbook read Geoff Moore’s “Zone to win“.

There are three techniques

1. Business model innovation; design an innovative business model that can truly grow. That is an open door. A “DUH! A company’s business model describes how it generates financial returns by producing, selling, and supporting its products. You need design business models with characteristics that allow them to quickly achieve massive scale and sustainable competitive advantage. Take into account Moore’s law, automation, adaptability (not optimisation) and realising that business model innovation involves trying something that is new, and thus unproven. Be a contrarian. Open door number 2.
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. You want to create a competitive advantage or climb a deep learning curve. Open door number 3. There is a rule. Dropping below even 40% annual growth is a warning sign for investors.
3. Management innovation. Your teams will grow bigger, you will need to move from generalists to a specialist, introduce management and communication layers, become increasingly data-driven, move from single focus to multithread, put in place procedures and guiding principles and develop your leadership style and qualities. The advice is to hire people who have blitzscaled before. Open door number 4.

Other rules

• If you don’t have a product/market fit, it won’t work. Open door number 5.
• If you can’t operationally scale to meet the demands, it won’t work either. Open door number 6.
• You need a big market. Starting with a good beachhead as the stepping stone. Companies should focus on niche beachhead markets, from which the company can expand outward using a “bowling pin” strategy in which these markets help to open up adjacent markets.
• Distribution is key. A good product with great distribution will almost always beat a great product with poor distribution. Preferably with using existing networks or a virality effect.
• You need a high gross margin. Preferably 60, 70, or even 80%. The key insight here is that even though gross margins matter a great deal to the seller, they are irrelevant to the buyer. How often do you consider the gross margin involved when you make a purchase? Typically, you focus solely on the cost to you, and the perceived benefits of the purchase.

Network effect

You need a network effect. The magic of network effects is that they generate a positive feedback loop that results in superlinear growth and value creation. This superlinear effect makes it very difficult for any node in the network to switch from an incumbent to an alternative customer lock-in since it is almost impossible for any new entrant to match the value of plugging into the existing network.

Increasing returns to scale

The resulting phenomenon of “increasing returns to scale” often results in an ultimate equilibrium in which a single product or company dominates the market and collects the majority of its industry’s profits. In addition to supporting network effects, the high connectivity of the world we live in today also makes it easier to reach the tipping point where network effects kick in, and to sustain those network effects and the market dominance they produce.Hence the winner takes all.

You have five types of network effects

1. Direct Network Effects: Increases in usage lead to direct increases in value. (Examples: Facebook, messaging apps like WeChat and WhatsApp)
2. Indirect Network Effects: Increases in usage encourage consumption of complementary goods, which increases the value of the original product (Example: Adoption of an operating system such as Microsoft Windows, iOS, or Android encourages third-party software developers to build applications, increasing the value of the platform.)
3. Two-Sided Network Effects: Increases in usage by one set of users increases the value to a different set of complementary users, and vice versa. (Example: Marketplaces such as eBay, Uber, and Airbnb)
4. Local Network Effects: Increases in usage by a small subset of users increases the value for a connected user.
5. Compatibility and Standards: The use of one technology product encourages the use of compatible products. (Example: within the Microsoft Office suite, Word’s dominance meant that its document file format became the standard.

The tips

• Bits over atoms. Create digital goods.
• Create a platform or market place.
• Use free or freemium to scale.
• Create a subscription model.
• Don’t underestimate content feeds.
• The more intense the competition, the faster you should try to move
• Once you decide to blitzscale, the key question you need to ask and answer is “How can we move faster?”
• Speed is more important than having a “well-run” organisation.
• Blitzscaling requires capital, whether from investors or from cash flow, to fund relatively inefficient growth.
• Successful blitzscaling is an exercise in serial problem-solving.
• One of the signature strategies for blitzscaling is rapid, parallel market development.
• Embrace chaos
• Focus on right now versus right one.
• Let fires burn.
• Never ignore culture.

Culture

As someone who talks and writes about culture and storytelling, I am happy that again culture is regarded as an important factor. Culture as a shared way of doing things. The usual questions:

• What is your organisation trying to do?
• How are you trying to achieve those goals?
• What acceptable risks are you incurring to achieve those goals more quickly?
• When you have to trade off certain values, which ones take priority?
• What kind of behaviour do you hire, promote, or fire for?

The book makes an interesting point. The primary culture of an organisation typically originates in the functional area that is most critical to the success of the company. And as we know the development of organisational culture is intimately intertwined with branding. In blitzscaling companies, culture becomes increasingly important and increasingly difficult to maintain, as the organization grows. Read “Fusion”

I don’t like the book very much. Full of open doors, Not really a predictable model. Reminds me of “Good to great” (the book I love to hate). As Freek Vermeulen will tell you in “Business exposed“, there is no fixed playbook, there are too many factors involved, and too many conditions need to be met to be able to pull it off.

Perspective on scale

What it does do is to give you a hyper offensive perspective on scaling. I have no doubt “Blitzscaling” will become a buzz word. I have no doubt that if you meet the qualifying factors, you should consider it as a strategy and if you are a startup you should make these criteria part of your business model. It still is a world where winners take all…..

Off the rails

Where I think the book completely goes off the rails is when it starts to defend the big companies and the good they have done to the world. I go back to my opening paragraph. Read “The four” or pick up “LikeWars, the weaponisation of social media“. “LikeWars” should become compulsory reading for anyone active in social media (that is everybody). Blitzscaling might even be a dangerous thing, particularly with technologies of which we do not yet understand the impact. Think AI, genetics and synthetic biology.

It should not all be about money.