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

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

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

ratings:
4.5/5 (3 ratings)
Length:
392 pages
7 hours
Released:
Oct 9, 2018
ISBN:
9780008303655
Format:
Book

Description

Foreword by Bill Gates

From the authors of New York Times bestsellers, The Alliance and The Start-up of You, comes a smart and accessible must-have guide for budding entrepreneurs everywhere.

Silicon Valley is renowned for its striking number of businesses which have grown from garage start-ups into global giants; Apple, Cisco, Google, HP and Intel to name a few. But what is the secret to their outstanding success? Hoffman and Yeh explain that it’s simple: they’ve learnt how to blitzscale.

Featuring case studies from numerous prominent tech businesses such as AirBnB and WeChat, this book offers a specific set of practices for catalysing and managing dizzying growth in bourgeoning start-ups. Prioritising speed over efficiency in an environment of uncertainty, Blitzscaling illustrates how businesses can accelerate to the stage in a company’s life cycle where the most value is generated. Using the framework provided by Hoffman and Yeh, readers will learn how to design business models which simultaneously support growth at a furious pace and capture the market, as well as how to navigate the necessary shifts in strategy needed at each level of scale.

Released:
Oct 9, 2018
ISBN:
9780008303655
Format:
Book

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Blitzscaling - Reid Hoffman

Introduction

2011: SAN FRANCISCO, AIRBNB HEADQUARTERS

They’re probably going to kill you.

The year was 2011, and in the offices of Airbnb, then a scrappy little forty-person start-up, its cofounder and CEO Brian Chesky had just received some very bad news.

Brian pondered the implications of the ominous prediction he’d just heard from Andrew Mason, the cofounder and CEO of Groupon. He didn’t like it.

Brian and his cofounders, Joe Gebbia and Nathan Blecharcyzk, had already fought their way through plenty of obstacles to build Airbnb, a website that makes it easy for people to rent out their rooms or homes for the night. In the beginning, every investor the founders approached had turned them down or, worse, ignored them. The company was on the upswing now, but the painful early days were still fresh in their minds, and they weren’t looking for another battle.

When the Airbnb founders first met, Paul Graham, the highly regarded founder of the start-up accelerator Y Combinator (YC), told them flat out that their idea was terrible. People are actually doing this?! he incredulously asked. When Brian told him yes, people were, in fact, renting out their living spaces for a night, Graham’s response was "What’s wrong with them?"

Still, Graham had accepted the Airbnb guys into the three-month-long YC program. Not because he was inspired by their Airbnb business, but because he was impressed by the hustle of the founders. He loved the (now famous) story about how Chesky and his cofounders managed to pay the bills while trying to get Airbnb off the ground. It was 2008, a US presidential election year, so they created and sold special-edition cereals called Obama O’s and Cap’n McCains—a sugary parody of (or tribute to, depending on how you look at it) that year’s candidates Barack Obama and John McCain. The creativity and persistence displayed by the Airbnb founders as cereal entrepreneurs got them in the door at YC; once in the program, they refined their business and were able to persuade two leading venture capital firms, Sequoia Capital and Greylock Partners (where I am a general partner), to invest.

Now, nearly four years later, it seemed like all the hard work was finally starting to pay off. Having celebrated its millionth booking, Airbnb had plenty of working capital, and it was clear that the concept was valuable.

But when you’re successful, you attract competition. And sometimes that competition represents a deadly threat.

In Airbnb’s case, that threat was three brothers from Cologne, Germany: Oliver, Marc, and Alexander Samwer. They had become billionaires by analyzing successful US companies, rapidly creating copycats in Europe, and, in many cases, selling those cloned companies to their original American inspirations. In other cases, the Samwers actually held on to and built out their clones; Zalando, the Zappos of Europe, had over ten thousand employees and was worth more than $10 billion in 2017.

Their first success was Alando, an eBay knockoff that they were able to sell to eBay for $43 million, just one hundred days after launching it. The Samwer brothers then invested in the German versions of YouTube (MyVideo), Twitter (Frazr), and Facebook (StudiVZ) before founding their own start-up studio, Rocket Internet.

In early 2011, Brian and his team started noticing that Airbnb users were being spammed by a new company named Wimdu. Wimdu had apparently just received $90 million—the largest investment in a European start-up to date—from none other than Rocket Internet and Kinnevik, a major Swedish investment company that had partnered with the Samwer brothers.

The problem? Wimdu’s business model and website looked like a knockoff of Airbnb’s.

Wimdu was founded in March 2011, and, within weeks, the Berlin-based company had hired a staggering four hundred employees and opened twenty offices across Europe. Meanwhile, the original, but much smaller, Airbnb had raised only $7 million, had just forty employees, and operated out of a single office in San Francisco. As a first-time CEO, Brian wasn’t even sure what was involved in opening a second office, let alone dozens more on another continent.

Brian also knew that if Wimdu was able to capture and dominate the European market, Airbnb might not survive. If you’re a travel site and you don’t cover Europe, you’re dead, he told us in 2015, when he visited the Technology-Enabled Blitzscaling class we taught at Stanford University.

The Samwer brothers had named their price: Airbnb could have Wimdu in exchange for a 25-percent stake in Airbnb. Now Brian faced a difficult decision, with painful consequences regardless of what option he chose.

In response, Brian turned to one of his favorite decision-making techniques: reaching out to the world’s leading experts. His first call was to the CEO of Groupon at the time, Andrew Mason. The leading daily deals company had had a similar experience the previous year: In December 2009, the Samwer brothers had launched CityDeal, their Groupon lookalike. Six months later, Groupon paid a nine-figure price, roughly 10 percent of its valuation at that point, to acquire this competitor.

Here was the question weighing heavily on Brian and his team: Should Airbnb follow Groupon’s strategy and just buy the knockoff company? Brian’s gut instinct was to say no. Integrating Wimdu’s finance-centric and metric-driven team could harm Airbnb’s design-driven culture. He was also reluctant to reward what he saw as a legal extortion racket rather than a sincere attempt to create value in the market.

Yet Brian felt he had an obligation to consider the offer. Mason had told him that despite the many problems the CityDeal acquisition had brought, it had also accelerated Groupon’s progress into the European market, which ended up accounting for nearly 30 percent of its global sales. It could easily be argued that giving up 10 percent of Groupon for CityDeal was actually a good deal. But perhaps emboldened by their successful CityDeal gambit, the Samwers were asking for a far larger share of Airbnb—a full 25 percent.

On the other hand, Airbnb could reject the offer and instead take on the aggressive Samwer brothers in a head-to-head competition. But Wimdu had the home-turf advantage, not to mention ten times the number of employees and more than ten times the amount of invested capital. Competing against them would be one hell of an uphill battle.

Tired of the fund-raising grind, especially its emotional toll, Brian wondered whether he had it in him to take on this new and likely bruising fight. But he and his team had spent eighteen seemingly fruitless months working on Airbnb before entering Y Combinator, racking up tens of thousands of dollars in credit card debt. After all the blood, sweat, and tears, were they really willing to give up a quarter of their company?

Ultimately, Brian decided not to buy Wimdu, swayed in part by the arguments of his key advisers. Facebook founder Mark Zuckerberg counseled him to fight. Don’t buy them, he said. The best product will win.

YC’s Paul Graham gave similar feedback. They’re mercenaries. You’re missionaries, he told Brian. They’re like people raising a baby they don’t actually want.

When Brian reached out to me for my advice on the situation, I too advised him not to buy Wimdu. The key issue wasn’t the price and dilution, but the way a merger could pose impediments to speed and success. Buying [Wimdu] adds a substantial amount of integration risk, which tripped up Groupon after buying CityDeal, I told him. Merging company cultures and company management could create potentially fatal risks, especially if it slows us down. With Airbnb, we have a business that is already benefiting from network effects. We can win. I stand by that advice today.

In the end, Airbnb’s founders realized that they wanted to take on the Samwers—and they wanted to win. But how?

The key was an aggressive, all-out program of growth that we call blitzscaling. Blitzscaling drives lightning growth by prioritizing speed over efficiency, even in an environment of uncertainty. It’s a set of specific strategies and tactics that allowed Airbnb to beat the Samwer brothers at their own game.

Just a few months later, determined to acquire the resources needed to outscale the Samwers, Brian raised $112 million in additional venture capital. Airbnb then embarked on an aggressive international expansion plan, including the acquisition of Accoleo, a smaller and more affordable German Airbnb clone, that allowed Airbnb to compete directly with Wimdu in its home market. By the spring of 2012, Airbnb had opened nine international offices, setting up shop in London, Hamburg, Berlin, Paris, Milan, Barcelona, Copenhagen, Moscow, and São Paulo. Bookings had grown ten times since that previous February, and in June 2012 Airbnb announced its ten millionth booking.

The Samwers gave us a gift, Brian admitted many years later in our Blitzscaling class. They forced us to scale faster than we ever would have. By choosing to grow at a breakneck pace, Airbnb had achieved a dominant position in its market. Despite the initial advantages that the Berlin-based Wimdu had in human resources, financial capital, and European market knowledge, the techniques that Brian and his cofounders implemented allowed Airbnb to meet and ultimately defeat its challenger.

2010: SHENZHEN, CHINA, TENCENT HEADQUARTERS

About a year before Airbnb embarked on its blitzscaling journey, in a different CEO’s office on the other side of the world, the message that would change everything arrived in the middle of the night.

It was the fall of 2010, and Pony Ma (Chinese name: Ma Huateng) was trying to figure out what came next for Tencent, the company he had run since founding it in 1998 with four classmates from Shenzhen University. Thanks to its core product, the QQ instant messaging service, which had 650 million monthly active users, Tencent had become one of China’s most valuable Internet companies with revenues of nearly $2 billion, a market capitalization of over $33 billion, and more than ten thousand employees. However, QQ was now a mature desktop product based on late-1990s technology, and its user base had stopped growing. Its American counterpart, AOL Instant Messenger, was already in a swift decline.

Ma was convinced that Tencent had to develop a new breakthrough product for the emerging smartphone platform—or else. Internet companies that can react will survive, he said, and those who can’t will die.

The message Pony Ma read that night was from one of Tencent’s employees, Allen Zhang (Chinese name: Zhang Xiaolong), a fellow entrepreneur whose company, Foxmail, Tencent had acquired five years earlier. Zhang now ran the company’s Guangzhou R&D division, which was a two-hour drive from Tencent’s Shenzhen headquarters. He had been monitoring the rapid growth of a new social messaging product called Kik, which was especially popular among young people. He decided that Tencent needed to create its own social messenger for smartphones—and quickly.

Zhang’s proposal represented not only a huge opportunity but also a huge risk, with equally huge uncertainty about the outcome. While a new messenger service might appeal to young consumers, it was probably going to cannibalize QQ, which was, after all, Tencent’s core business. Furthermore, Tencent had partnered with leading mobile carriers like China Mobile to receive 40 percent of the SMS charges that QQ users racked up when they sent messages to mobile phones. A new service could hurt Tencent’s financial bottom line and at the same time risk its relationships with some of China’s most powerful companies.

It was the sort of decision that publicly traded, ten-thousand-person companies typically refer to a committee for further study. But Ma wasn’t a typical corporate executive. That very night, he gave Zhang the go-ahead to pursue the idea. Zhang put together a ten-person team, including seven engineers, to build and launch the new product.

In just two months, Zhang’s small team had built a mobile-first social messaging network with a clean, minimalistic design that was the polar opposite of QQ. Ma named the service Weixin, which means micromessage in Mandarin. Outside of China, the service became known as WeChat.

What came next was staggering. Just sixteen months after Zhang’s fateful late-night message to Ma, WeChat celebrated its one hundred millionth user. Six months after that, it had grown to two hundred million users. Four months after that, it had grown to three hundred million users.

Pony Ma’s late-night bet paid off handsomely. Tencent reported 2016 revenues of $22 billion, up 48 percent from the previous year, and up nearly 700 percent since 2010, the year before WeChat’s launch. By early 2018, Tencent reached a market capitalization of over $500 billion, making it one of the world’s most valuable companies, and WeChat was one of the most widely and intensively used services in the world.

Fast Company called WeChat China’s app for everything, and the Financial Times reported that more than half of its users spend over ninety minutes a day using the app. To put WeChat in an American context, it’s as if one single service combined the functions of Facebook, WhatsApp, Facebook Messenger, Venmo, Grubhub, Amazon, Uber, Apple Pay, Gmail, and even Slack into a single megaservice. You can use WeChat to do run-of-the-mill things like texting and calling people, participating in social media, and reading articles, but you can also book a taxi, buy movie tickets, make doctors’ appointments, send money to friends, play games, pay your rent, order dinner for the night, plus so much more. All from a single app on your smartphone.

Ma himself recognized the importance of the decision he had made, saying in an interview, Looking back, those two months were a matter of life and death.

These stories of extreme growth, whether in California or halfway around the world in China, are perfect examples of why it’s valuable to study what blitzscaling is and how it works.

Throughout this book, we will be telling the stories of various blitzscalers. Appendix B: The Blitzscalers includes brief profiles of these companies that provide more context. For even more background, visit Blitzscaling.com.

BLITZSCALING: THE SECRET WEAPON FOR BUILDING SCALE-UPS

When a start-up matures to the point where it has a killer product, a clear and sizable market, and a robust distribution channel, it has the opportunity to become a scale-up, which is a world-changing company that touches millions or even billions of lives. Often, the fastest and most direct path from start-up to scale-up is the hypergrowth produced by blitzscaling.

The enterprise software company Slack reached this critical stage once it was able to demonstrate the rapid and accelerating adoption of its team messaging apps by its initial market of software development teams. Nearly five years passed between the time when Slack was founded and the initial launch of its product. But once it launched, Slack users themselves drove user growth by adding many colleagues at a time, aided by a frictionless process that allowed new users to jump in with a simple Web application or by downloading a mobile app from iTunes or Google Play. After the company reached this point, it began to scale rapidly, adding employees, capital, and customers at a blistering pace. Slack had raised $17 million during the first five years of its life; within eight months of launch, it had raised another $163 million and a total of $800 million by late 2017.

Any company, whether a global giant or a start-up in a cofounder’s garage, would love to launch and grow killer businesses like Airbnb, WeChat, and Slack. Yet those who actually manage to do so, especially to the degree that Brian Chesky and Pony Ma did, are still exceedingly rare. Why is that? What sets these companies apart from the rest?

In this book, we will argue that the key to rapidly building massive businesses in today’s environment is the aggressive growth strategy of blitzscaling: a set of techniques that allows both start-ups and established companies to build dominant, world-leading businesses in record time.

ENTERING THE BLITZSCALING ERA

Over the past two decades, the Internet has completely reshaped both our daily lives and the world of business. Netscape’s blockbuster IPO on August 9, 1995, marked the beginning of both the dot-com boom and what I call the Networked Age. At the time, the rising stock prices of the dot-com boom attracted the most attention, but, in retrospect, the biggest change was that the Internet was beginning to connect all of us to people, information, resources, and other networks. There have been other revolutions in the past—steam, electricity, and radio spring to mind—but what makes the impact of the Internet so unique and so far-reaching is the fact it has made everything so much faster. Today, every individual can connect to any other individual immediately; that increased velocity is what makes blitzscaling possible and so powerful.

The speed of the Internet has generated a number of second-order effects that have changed how businesses and organizations can grow. For example, the Internet has made it possible to access global markets and tap into massively scalable distribution channels in a way that wasn’t feasible during earlier eras. But perhaps the most important impact for businesses has been the rising significance and prevalence of so-called network effects that occur when increased usage of a product or service boosts the value of that product or service for other users. For example, each additional Airbnb host makes the service a tiny bit more valuable for every other Airbnb guest and vice versa. Each additional WeChat user makes the service a tiny bit more valuable for every other WeChat user, and so on.

Network effects generate a positive feedback loop that can allow the first product or service that taps into those effects to build an unassailable competitive advantage. For example, eBay was founded in 1995, yet network effects keep it a dominant player in peer-to-peer commerce two decades later. Airbnb offers over three million listings in sixty-five thousand cities around the world; think of how difficult it would be for a new entrant to offer anywhere close to the same selection and value.

We’re reminded of the famous scene from the movie Glengarry Glen Ross, in which Alec Baldwin’s character, Blake, is speaking to a group of salesmen:

As you all know, first prize is a Cadillac Eldorado. Anyone wanna see second prize? Second prize is a set of steak knives. Third prize is you’re fired. Get the picture?

First prize in the first wave of consumer social networking went to Facebook; second prize to MySpace; third prize to Friendster. Remember Friendster? You need to win first prize in order to survive in the Internet era.

The level of competition can seem overwhelming at times, but the Networked Age also allows companies to reap incredible rewards much more rapidly than at any other point in history. We call the strategy and mindset they can use to get there blitzscaling.

Blitzscaling is a strategy and set of techniques for driving and managing extremely rapid growth that prioritize speed over efficiency in an environment of uncertainty. Put another way, it’s an accelerant that allows your company to grow at a furious pace that knocks the competition out of the water.

Blitzscaling requires hypergrowth but goes beyond the blunt strategy of get big fast because it involves purposefully and intentionally doing things that don’t make sense according to traditional business thinking. In the Blitzscaling Era, you have to make a tough call:

Take on the additional risk and discomfort of blitzscaling your company,

Or accept what might be the even greater risk of losing if your competition blitzscales before you do.

Was Airbnb’s decision to expand into European markets—a move that could have stretched the company so thin as to destroy its core business—either efficient or certain? Hardly. Airbnb could easily have failed, burning through all its capital while essentially ceding the European market to its copycat competitor Wimdu. Yet the risky decision proved the right one.

Blitzscaling disrupts entire industries, such as music, video games, and telephony, with both new technologies and new business models … and those are examples from just a single company. (You know, the one that produced the iPod, iTunes, the iPhone, and the iPad, to name just a few.) These waves of disruption affect every aspect of our daily lives, from the jobs we work, to the products we use, to the way we connect with one another.

Disruption on its own is neither good nor bad, but it always involves change. Replacing a $10 product with a $1 product of equal or better quality looks like a disaster to an incumbent player, but, for society as a whole, it means greater productivity. The buyer gets the desired product, and now also has $9 available to invest in other things. Netflix has been bad news for broadcast and cable networks, but it has been great news for fans and creators of movies and television. Yes, disruption produces losers as well as winners, but, as a whole, it is a vital source of growth and opportunity that you can’t afford to ignore.

It’s good to keep in mind that those who extoll the virtues of disruption tend to be—coincidentally enough—the ones in the winners’ circle. But disruption that spreads its benefits and new opportunities broadly is better for society. Fortunately, most disruption falls into this category. In a 2004 working paper, Schumpeterian Profits in the American Economy: Theory and Measurement, Yale economist William Nordhaus examined the US economy from 1948 to 2001. Based on the data he collected, he concluded that only 2.2 percent of profits that arise when firms are able to appropriate the returns from innovative activity went to the disrupters. Most of the benefits of technological change are passed on to consumers rather than captured by producers, he concluded. Like it or not, change is inevitable—but it doesn’t have to be wholly unexpected.

In their book Future Shock, the futurists Alvin and Heidi Toffler wrote that change is the only constant, and to survive, to avert what we have termed future shock, the individual must become infinitely more adaptable and capable than ever before. Those words were originally published in 1970. The pace of change has only accelerated since then.

Everyone should have the opportunity to learn how blitzscaling works, because it is already impacting their lives. And once they know how it works, they can use it to reshape the world. People should be part of building the future rather than feeling like the future is being forced upon them.

Blitzscaling is what separates the start-ups that get disrupted and disappear as the world changes from the ones that scale up to become market leaders and shape the future.

This book was born out of a class we taught at Stanford in which we dissected the process that went into growing the world’s largest technology companies and then codified a series of tactics and choices that made it work. The result was a specific set of principles that describes how to grow multibillion-dollar companies in a handful of years.

While writing this book, we talked to hundreds of entrepreneurs and CEOs, including those of the world’s most valuable companies, such as Facebook, Alphabet (Google), Netflix, Dropbox, Twitter, and Airbnb. (You can hear a number of these conversations on my podcast, Masters of Scale.) Even though the stories of their companies’ rise were very different in many ways, the one thing they all had in common was an extreme, unwieldy, risky, inefficient, do-or-die approach to growth.

In this book, we draw lessons from these world-leading companies to explain the nuts and bolts of how to blitzscale, when to blitzscale, why to blitzscale, and the global impact of the companies that are blitzscaling all around you right this second.

This quest will take us all over the globe, but one place in particular stands out.

SILICON VALLEY: THE PERFECT PLACE TO DECODE BLITZSCALING

Although companies have successfully blitzscaled on every continent except for Antarctica, the most prominent and most concentrated set of examples comes from California’s Silicon Valley. And while we can’t simply copy and paste the techniques that work in Silicon Valley and expect them to work the same way in Shanghai, neither can we cut and paste from Shanghai to Stockholm, nor from Stockholm to São Paulo. Instead, we try to extract some universal lessons and then explore how they apply across the world.

As of this writing at the end of 2017, there are only fourteen publicly traded technology companies in the world that have a market capitalization of over $100 billion. Want to guess how many of those are in Silicon Valley? Seven—that’s half of the world’s most valuable tech companies.

Taken together, Silicon Valley’s 150 most valuable publicly traded technology companies are worth $3.5 trillion. That number is so big it doesn’t mean anything to most of us. So consider this: those 150 companies alone make up 50 percent of the value of the NASDAQ, and they account for over 5 percent of the entire world’s market capitalization. That’s a lot of value created by a region with an estimated 3.5 to 4 million residents, or roughly 0.05 percent of the world’s population.

While we fully accept that this may change in the future, the historical and current success of Silicon Valley makes it the perfect place to examine this question: What is the most effective way to rapidly build massively valuable companies?

When outsiders look at Silicon Valley, they often think that the key to this question is innovative technology. But as you’ll read, technological innovation alone doesn’t make for a thriving company.

Silicon Valley insiders and well-read outsiders believe that the key is the combination of talent, capital, and entrepreneurial culture that makes it easy to start new companies. This too is wrong.

Sure, Silicon Valley is the leading hub for high-tech talent and venture capital, but it didn’t start out that way. Sure, it is blessed with great universities, such as Stanford and Berkeley, but so are plenty of other regions. The answer can’t be simply the combination of venture capital, research universities, and smart people. This combination of ingredients is far from unique. In fact, the same basic ingredients can easily be found in numerous start-up clusters in the United States and around the world: Austin, Boston, New York, Seattle, Shanghai, Bangalore, Istanbul, Stockholm, Tel Aviv, and Dubai.

To discover the secret to Silicon Valley’s success, you need to look beyond the standard origin story. When people think of Silicon Valley, the first things that spring to mind—after the HBO television show, of course—are the names of famous start-ups and their equally glamorized founders: Apple, Google, Facebook; Jobs/Wozniak, Page/Brin, Zuckerberg.

The success narrative of these hallowed names has become so universally familiar that people from countries around the world can tell it just as well as Sand Hill Road venture capitalists. It goes something like this: A brilliant entrepreneur discovers an incredible opportunity. After dropping out of college, he or she gathers a small team who are happy to work for equity, sets up shop in a humble garage, plays foosball, raises money from sage venture capitalists, and proceeds to change the world—after which, of course, the founders and early employees live happily ever after, using the wealth they’ve amassed to fund both a new generation of entrepreneurs and

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