Book Review: Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies

The first book that I read after joining N26 was “Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies” by Reid Hoffman. It helped me a lot during my first months to understand what was going at the company. Today I want to share my thoughts about the book as I believe it’s very important for everyone who joins a fast-scaling company or simply wants to understand better the world of venture-capital-backed companies. 

A company in the blitzscaling stage prioritizes growth over efficiency.

One way to start a business is to get some initial capital(ideally your own capital) and create a small company. Then with time, you optimize your business model and get some profit. You invest the profit in the company’s growth. If the company doesn’t make any profit you try to optimize more. Step by step your company is growing bigger and bigger. Jason Fried and David Heinemeier Hansson wrote a great book describing this approach. Historically most of the companies were built in this way and that’s why the majority of people consider this as the only way to build companies. 

Reid Hoffman in his book suggests a completely different approach to build global businesses: blitzscaling. Initially, startups need to test several product offerings to see how to best satisfy users’ needs, and as soon as they see that users love the product, startups need to try to grow as much as possible. Companies in the blitzscaling stage prioritize growth over efficiency. In order to do so, they need to have access to a lot of capital and that’s why they are usually venture-backed. Successful companies might enter the blitzscaling stage even without a proven business model, but they never start scaling without a product that customers love. For example, describing his initial time at PayPal Hoffman said, that for them it was cheaper to throw stacks of hundred-dollar bills from PayPal office’s roof than to run PayPal as a business. He also provided an example from LinkedIn history: when investors asked Reid to show their business model he said there were not going to make any profit until the later stage, so it was too early to create one. When they insisted, Reid spent an evening with the team and some wine and wrote a business model. The only reason why he thinks that the evening wasn’t completely wasted is that the wine was really good.

Blitzscaling approach is quite new and that’s why not everyone fully understands it. For example, N26 CFO Maximilian Tayenthal was heavily criticized when he said that “profitability is not one of our core metrics”. Yes, it would be super weird if a CFO of a bank with 150 years of history said that. But that’s exactly how a company in a blitzscaling phase looks like. For such a company, growth is the key metric and it needs simply to follow the rule of 40. “Rule of 40” states that the growth rate of the company plus the company’s profit should be at least 40%, meaning that if the company grows at a 60% year-to-year rate, investors will be happy with it losing 20% of their invested money. It’s not a Ponzi scheme and investors are not crazy, because there is one catch: the company should be profitable on a per-unit basis. If a company is profitable on a per-unit basis and is loss-making overall then it means that the company can decide to be profitable right now by cutting marketing or other growth costs, but it CHOOSES to be loss-making in order to achieve high growth and revenue in the future. Most of the investors decided to invest in the company to get higher profits much later, so they are completely happy with a such choice.

Successful companies don’t blitzscale until they absolutely have to

Blitzscaling is not a silver bullet as it creates many problems. The most notable problems are:  

1. Inefficient use of capital. All good practices of a lean startup(like proper planning, low burn rate, and slow growth) blitzscaling packs together and throws out of a window. During the blitzscaling phase, quick guesstimates become more important than proper planning and rapid growth is prioritized over a low burn rate. Blitzscaling is not the time to think about small optimizations, it’s all about growing your team and customer base as fast as you can.
2. The company’s culture suffers. Imagine you are working in a small friendly team and you even had time to meet everyone’s families. Early-stage startups quite often feel like a family(Reid Hofmann even calls the first stage of startup life “family”). Now imagine that in 2 months half of your team is replaced by new team members and in 6 months the company grows so fast that you begin rarely recognize faces on your floor. On top of that, some of your former colleagues start leaving the company(I’ll talk about reasons later in the article). Also, it’s incredibly hard to hire fast many and at the same time great employees. Usually, between quality and quantity, you have to pick only one, that’s why the hiring bar is also going down. All this leads to reduced connections between the team and, as a consequence, to reduced team morale and company culture. That’s why scaling the team too fast is something that the founder of Zappos Tony Hsieh describes in the book Delivering Happiness as one of his mistakes. 
3. Customer satisfaction decreases. If your product is still far from perfect(remember that you have no time to wait until launching a perfect product?) and your customer base is growing way faster than your customer support team, the only thing that you can do with your angry customers is to ignore them. Will ignored angry customers be happy? No, not at all, but according to Reid Hofmann that the price that you have to pay to archive rapid growth in record-breaking time. 

After reading all this you probably wonder why any sane person would ever want to waste raised capital, decrease employees’ engagement, and reduce customer satisfaction. The main reason to follow the blitzscaling path is usually competition. Many markets are winner-take-all markets. Let’s use social networks as an example. The more users use a particular network the more value it brings to them. If all your friends are using one network it’s unlikely that you’ll join another. In such markets being the first big company gives a huge first-scaler advantage. That’s why everyone knows Facebook, some older people know MySpace and only people, who are interested in startup history know Friendster. And even if tomorrow there is a competitor with a slightly better product, it will take the dominant player less time to copy a new feature than for a new entrant to conquer the market.

With growing globalization more and more markets become global and that’s why a company on the other side of an ocean can still be your competitor. Reid Hofmann provides an example of brothers Samwer, that were launching copycats of successful American companies in Germany. For example, they launched Windu(a clone of Airbnb) and Zalando(a clone of Zappos). When in 2011 founder of Airbnb Brian Chesky noticed a competitor in Germany, he and his co-founders made a hard decision to blitzscale to crush the competition. As mentioned above founder of Zappos Tony Hsieh didn’t like the idea of growing too fast and Zappos didn’t go international. Nowadays it’s easy to notice the results of these decisions. Airbnb before Corona-crisis was worth around $31 billion and is still one of the largest private companies worldwide well-known worldwide. Wimdu went through a number of M&As and only some people in German-speaking Europe know it. Tony Hsieh built Zappos as a company well-known for its culture and customer satisfaction, but it was sold to Amazon in 2009 for $1.2 billion. Zalando is a public company and has €16 billion market capitalization. These numbers give a clear sign that Airbnb’s decision to blitzscale paid off.   

Blitzscaling is a stage in the company’s lifecycle not a characteristic of a company. 

In the book, Hofmann underlines that blitzscaling is a stage in a company’s life meaning that there are no companies that blitzscale all the time. It’s as important to know when to stop scaling as to know when to start. There are three main metrics that companies usually track to understand when it’s time to stop scaling: 

1. Unit economics. As blitzscaling is by definition an inefficient use of capital it’s important to track unit economics closely to notice a moment when it’s getting worse. It’s easy to scale a business that sells $10 for $1, but investors are not going to fund such a business. 
2. Growth rate. If your growth is significantly slowing down it’s time to stop funding it. 
3. Employee productivity and morale. During hyperscaling many employees become very busy with interviewing and onboarding decreasing the overall productivity of the company. As I mentioned previously blitzscaling has also a big tall on employees’ morale. All of this can and for some time should be tolerated, but it can’t be ignored forever. 

All this forces companies to stop blitzscaling and focus more on improving unit economics, fixing most common customer problems, do reorganizations to remove duplicating functions, reduce operational inefficiencies and put a lot of effort to improve team’s morale. This process is as important as blitzscaling itself because such hardening prepares the company for the next blitzscaling stage. The only thing to keep in mind is the quote from a former president of Y-Combinator Sam Altman “As soon as you stop growing you have a lot more problems”. He doesn’t recommend to stop growing entirely but rather shift company attention on growth from 100% to 10% to have enough time to pay company debt. 

Different company’s stages require different people. 

When a company is scaling very fast its customer base, it also has to scale fast its own team. This process has its own challenges and a few not so obvious tricks that Reid Hofmann recommends.

Early startups need generalists, scaleups need specialists.

Usually, the main problem of early-stage startups is too many problems to tackle and too few employees. For early-stage startups, there is also a big chance that they have to pivot and in pursuing the next idea companies might need a new set of skills. That’s why such companies require generalists - people that can tackle completely different problems. Another important advantage of generalists for startups is cost: a recent smart fresh grad can become a very successful generalist, but specialists usually have years of experience and that’s why they cost more. As the scale is small even if generalists make mistakes(and they for sure will) those mistakes are not so expensive as mistakes in later stages. 

With time costs of mistakes grow and a company needs to hire specialists, that can do only one thing, but they can do it really well. As a company matures the work that requires generalists is decreasing as well as the percentage of them. Most of the employees of late-stage scaleups are specialists. It’s interesting to notice that very often companies prefer to hire specialists to lead different functions and generalists are not getting promoted until they decide to specialize in an area.

Always hire Mr. Right Now. 

Imagine that you have 20 employees but in a year you plan to grow this number to 200. Who should you hire to lead them? It’s obvious that managers that can lead 20 employees and 200 have absolutely different profiles. People are usually optimistic(especially those that start new businesses) and they tend to hire a person that will be the right fit in the future. Reid Hofmann is strongly advising against this. There are two main reasons for this. First, no one really knows the future, and all your plans most probably will be wrong(it’s actually a so-called planning fallacy). So in reality you don’t know if you will ever need a person that can lead 200 people. Second, asking a person that can lead 200 people to lead 20 is a huge underutilization of this person and startups can not afford it. That’s why it’s better to hire someone who can lead 20 people and within a year will be able to stretch him/herself to lead 40 people. 

Companies can outgrow people.

Let’s now take an example when a company does grow significantly and now your manager has to lead more people than she or he is able to. Although Reid suggests to turn yourself into a “learning machine” only a very few people can start hands-on in a small startup, then become a team lead and then transition to an executive that leads thousands of people. That’s why most of the people at some time will have to hire someone who will take a higher title or take their own title. Unsurprisingly it applies not only to employees but also to founders. According to the statistics, only half of companies are still led by founder after 3 years from founding and only 25% of companies reached IPO with a founder-CEO. Hiring your own boss takes a lot of self-awareness and modesty. Reid Hoffman shared his personal story about why he decided to hire an external CEO Jeff Weiner to run LinkedIn. Reid understood that the job of a CEO of a small startup and a big company is completely different. CEO of a startup is more focused around product vision while CEO of a big company should be more concerned with day-to-day operations. Reid wasn’t passionate about later and that was the main driver why he decided to step down. 

Different people enjoy different stages of the company’s growth. 

Every new stage introduces a new level of management, new processes, new development practices. Not everyone likes that. That’s why it’s common to see when a company reaches a new stage some employees from the previous stage will start leaving the company. In the book, Reid provides many examples when a person leaves a successful company that reached the next stage and then joins a new company from the previous stage. Every stage has its pros and cons and different people enjoy different stages. Someone doesn’t want to start his/her own company but wants to be “in the room where it happens”. Someone finds it’s too risky to join a 10 people startup, but still wants to ship fast in the absence of too many users and managers. Someone likes to join a company when the time of quick-and-dirty solutions has passed and it’s time to drive the right solutions. Someone likes to have challenges of scale that only huge companies can offer. 

As there are no right or wrong answers it’s very important for you to understand what you are most passionate about and which stage you enjoy most in order to find the right company for you. 

Conclusion

All in all, the book will be very useful not only to someone who thinks about founding a new company but also for people without such aspirations. For the latter, it can help to find the right company to join, to better understand what is going around and what to expect next.

I believe that the knowledge of how to scale companies quickly is used to be Silicon Valley’s secret sauce and its main driver of success in building massively valuable companies. Thanks to Reid Hoffman it’s not so secret anymore and we are likely to see a more even distribution of scaleups across the world in the future. 

P. S. After reading the book you want to see more useful content from Reid? Here is a full course that he taught at Standford and his regular podcast Masters of Scale.