that is on an upward trajectory but doesn’t display the proverbial hockey stick of exponential growth and conclude that they need to either sell the business or take on additional risk that might increase the chances of achieving exponential growth. Achieving 20 percent annual growth, which would delight Wall Street analysts covering any other industry, simply isn’t enough to transform a start-up into a multibillion-dollar company fast enough. Silicon Valley venture capitalists want entrepreneurs to pursue exponential growth even if doing so costs more money and increases the chances that the business could fail, resulting in a bigger loss. Dropping below even 40 percent annual growth is a warning sign for investors.
This mindset can be difficult for people to understand. “Why should I risk it all and potentially blow up what is a successful, growing business?” they might rightfully ask. The answer is that blitzscaling businesses tend to play in winner-take-most or winner-take-all markets. The greater risk for a successful, growing business is to move too slowly and allow its competitors to win market leadership and first-scaler advantage.
Nokia is a great example of the cost of caution. In 2007, Nokia was the world’s largest and most successful maker of mobile phones, with a market capitalization of just under $99 billion. Then Apple and Samsung came blazing into the market. In 2013, Nokia sold its money-losing handset operations to Microsoft for $7 billion, and in 2016 Microsoft sold its feature phone assets and the Nokia handset brand to Foxconn and HMD for just $350 million. That’s a drop in value for Nokia’s mobile phone business from somewhere in the neighborhood of $99 billion to $350 million in less than a decade—a decline of over 99 percent.
At the time, Nokia’s decisions may have seemed to make sense. Nokia actually continued growing even after the launch of the iPhone and Google’s Android operating system. Nokia hit its peak in terms of unit volume when it shipped 104 million phones in 2010. But Nokia’s sales declined after that, and were surpassed by Android in 2011 and iPhone in 2012. By the time Nokia’s management realized the existential threat facing them, it was too late; even the desperation play of aligning themselves with Microsoft as its exclusive Windows Phone partner couldn’t reverse the decline.
Because blitzscaling often requires spending significant amounts of capital in ways that traditional business wisdom would consider “wasteful,” implementing a financial strategy that supports this aggressive spending is a critical part of blitzscaling. For example, Uber often uses heavy subsidies on both sides of the marketplace when it launches in a new city, lowering fares to attract riders and boosting payments to attract drivers. By paying out more than it takes in on those early trips, Uber is able to reach critical scale faster than a more conservative competitor. Given the winner-take-most nature of the ridesharing market, that “wasteful” spending has helped Uber achieve a dominant market position in the cities in which it operates. Of course, that strategy isn’t possible without the ability to raise massive amounts of capital on favorable terms. In Uber’s case, it has been able to raise nearly $9 billion between its founding and the writing of this book. At some point, Uber will have to demonstrate the ability to significantly improve its unit economics, or its investors will get very grumpy. This concern helps explain Uber’s significant investments in autonomous vehicle technology, which could eliminate its biggest expense—driver payments—in one fell swoop.
The willingness to take on the risks of blitzscaling is one of the major reasons why Silicon Valley has produced such a disproportionate share of blockbuster companies in comparison to other geographies. To be fair, it has also produced a disproportionate share of financial disasters—hence the word “risk” when talking about blitzscaling. But as the rise of juggernauts like Alibaba and Spotify illustrates, blitzscaling is also starting to take off around the world.
TECHNIQUE #3: MANAGEMENT INNOVATION
The final technique required for blitzscaling is management innovation. This is necessary because of the extreme strains placed on the organization and its employees by hypergrowth.
I am fond of pointing out to entrepreneurs and executives that “in theory, you don’t need practice.”
What I mean is that no matter how brilliant your business model and growth strategy, you won’t be able to build a real-world (i.e., non-theoretical) blockbuster company without a lot of practice. But that problem is magnified when you’re trying to blitzscale.
The kind of growth involved in blitzscaling typically means major human resources challenges. Tripling the number of employees each year isn’t uncommon for a blitzscaling company. This requires a radically different approach to management than that of a typical growth company, which would be happy to grow 15 percent per year and can take time finding a few perfect hires and obsessing about corporate culture. As we will discuss in more detail later in the book, companies that blitzscale have to rapidly navigate a set of key transitions as their organizations grow, and have to embrace counterintuitive rules like hiring “good enough” people, launching flawed and imperfect products, letting fires burn, and ignoring angry customers.
Over the course of this book, we’ll see how business model, growth strategy, and management innovation work together to form the high-risk, high-reward process of blitzscaling.
Of the three core techniques of blitzscaling, the first and most foundational is to design an innovative business model capable of exponential growth.
The story of entrepreneurship in the Internet era is a story of this kind of business model innovation.
Think back to the dot-com era, which stretched roughly from the IPO of Netscape in 1995 until the NASDAQ began to crash in 2000. During this period, enormous numbers of start-ups and pretty much every established company tried to build great Internet businesses, yet nearly all of them failed. The problem was, most of them simply tried to cut and paste existing business models onto the new online medium. You can’t transplant a heart from one species into another and expect it to thrive.
If you had asked stock market analysts in 1995 which companies were best positioned to dominate the Internet, most would have pointed to existing giants like Microsoft and Time Warner, which invested millions in Internet businesses like MSN and Pathfinder. Others would have mentioned “pure play” dot-com start-ups like eToys, which combined proven business models like the “category killer” store with the new online medium.
Yet when the wreckage of the dot-com crash cleared, the most successful companies still charging full steam ahead were the few start-ups that were designed around totally new business models, such as Amazon, eBay, and Google.
Walmart should have dominated online retail, yet Amazon emerged and practically wrote the bible for e-commerce, including consumer reviews, shopping carts, and free shipping. Newspapers and phone book companies should have been able to transfer their information businesses to the online world, but Yahoo! and then Google stepped up to the plate. They built the search engines that indexed the world’s information, and Google developed the business model that made it worth more than all traditional media companies combined.
In contrast, and much to their misfortune, start-ups that relied purely on technology innovation without any real business model innovation largely went bust. Companies like eToys that tried to “Amazon” various markets, but without Amazon’s front- and back-office innovations, crashed and burned once the financial markets began to demand profits rather than just expensive revenue growth. Even Netscape, whose Netscape Navigator mainstreamed Web browsing, and whose IPO kicked off the dot-com boom, was forced to sell itself off to AOL.
