Blitzscaling

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 a set of eponymous buildings for Stanford University’s Computer Science Department.

It’s an exciting and inspiring story. We get the appeal. There’s only one problem. It’s incomplete and deceptive in several important ways.

First, while “Silicon Valley” and “start-ups” are used almost synonymously these days, only a tiny fraction of the world’s start-ups actually originate in Silicon Valley, and this fraction has been getting smaller as start-up knowledge spreads around the globe. Thanks to the Internet, entrepreneurs everywhere have access to the same information. Moreover, as other markets have matured, smart founders from around the globe are electing to build companies in start-up hubs in their home countries rather than immigrating to Silicon Valley.

Second, simply starting a company is obviously insufficient. The start-ups that achieve massive value are those that have found a way to grow into scale-ups at an exponentially faster pace than their competitors.

So what secret alchemy is at work in Silicon Valley to fuel such rapid-fire growth of so many of the world’s most valuable tech companies? And if there is a secret, can it be identified, analyzed, understood, and, most important, applied elsewhere?

Blitzscaling is that secret. And the reason blitzscaling matters so much is that nothing about it is inherent to Silicon Valley.

There’s a common misconception that Silicon Valley is the accelerator of the world. The real story is that the world keeps getting faster—Silicon Valley is just the first place to figure out how to keep pace. While Silicon Valley certainly has many key networks and resources that make it easier to apply the techniques we’re going to lay out for you, blitzscaling is made up of basic principles that do not depend on geography. We’re going to show you examples from overlooked parts of the United States, such as Detroit (Rocket Mortgage) and Connecticut (Priceline), as well as from international companies, such as WeChat and Spotify. In the process you’ll see how the lessons of blitzscaling can be adapted to help build great companies in nearly any ecosystem, albeit with differing degrees of difficulty.

That’s the mission of this book. We want to share the secret weapon that has allowed Silicon Valley to punch so much (more than a hundred times) above its population index so that those lessons can be applied far beyond the sixty-mile stretch between the Golden Gate Bridge and San Jose.

It is sorely needed.

Here’s a startling fact: the global economy will need to create six hundred million new jobs by 2030 to meet the United Nations’ sustainable development goals. That’s less than fifteen years away. The world needs more than just new companies and new jobs; it’s going to need entire new industries.

Those industries better generate scale-ups as well as start-ups. It seems to us that it will be a lot easier to add six hundred million new jobs worldwide by creating sixty thousand new ten-thousand-person companies rather than sixty million new ten-person companies.

The late, great Andy Grove, Intel’s legendary CEO, understood and explained this when he wrote in a 2010 op-ed for Bloomberg:

Start-ups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

Recognizing what powers the rapid growth from start-up to scale-up, and understanding the principles behind how it works, will help entrepreneurs and companies apply these principles not just in small pockets of the United States and China but around the world.

WHO SHOULD READ THIS BOOK?

This book is for anyone who wants to understand the techniques that allow a business to grow from zero to a multibillion-dollar market leader in a handful of years.

These techniques should be of interest to entrepreneurs who want to build massive companies, venture capitalists who want to invest in them, employees who want to work for them, and governments and communities who wish to encourage the growth of these companies in their own regions. And even if you don’t want to build, invest in, or work for any of these companies, you’ll still need to navigate the world that they’re building.

If you are a manager or a leader who is trying to rapidly scale a project or a business unit within a larger company, blitzscaling can help you too. And while we draw these lessons primarily from the world of high tech, many of the principles and frameworks the book lays out (especially regarding people management) are applicable to high-growth companies in most industries worldwide, from European fast-fashion retailers to Texan oil shale companies.

Even organizations outside the business world can use blitzscaling to their advantage. Upstart presidential campaigns and nonprofits serving the underprivileged have used the levers of blitzscaling to overturn conventional wisdom and achieve massive results. You’ll read all these stories, and many more, in the pages of this book.

Whether you are a founder, a manager, a potential employee, or an investor, we believe that understanding blitzscaling will allow you to make better decisions in a world where speed is the critical competitive advantage.

With the power of blitzscaling, the adopted son of a Syrian immigrant (Steve Jobs), the adopted son of a Cuban immigrant (Jeff Bezos), and a former English teacher and volunteer tour guide (Jack Ma) were all able to build businesses that changed—and are still changing—the world.

The strategy and techniques we describe in this book are based on my experiences as a member of the founding team at PayPal; as the cofounder, CEO, and now executive chairman at LinkedIn; as a leading investor in Facebook and Airbnb; and as an investor at Greylock Partners, where I worked with many other billion-dollar companies, such as Workday, Pandora, Cloudera, and Pure Storage. My partners at Greylock and I have helped these companies go from garage to global dominance, and, in this book, we’ll share with you what we believe are important frameworks for understanding and addressing the challenge of blitzscaling across the different elements of your organization.

Yet as many good business books disclaim, while this is a playbook and a strategy guide, it isn’t a book of precise recipes. Regardless of how the popular press portrays things, each formula for building a great company is unique and depends on the market opportunity, the founders, and the network in which they operate. The truth is there is absolutely nothing guaranteed as a one-size-fits-all, must-follow rulebook for everyone. However, there are patterns. So in addition to individual tips and tricks, this book offers a set of frameworks and strategies for leaders, entrepreneurs, and intrapreneurs to adapt to their own needs and circumstances.

A QUICK NOTE ON THE TERM “BLITZSCALING”

The term “blitzscaling” derives from the twentieth-century usage of “blitz” as a way of describing a sudden, all-out effort. The first usage of blitz in this way was to describe the “blitzkrieg” (“lightning war”) strategy that General Heinz Guderian devised for the initial military campaigns of Nazi Germany during World War II. Ironically enough, Guderian was heavily influenced by British military thinkers like Basil Liddell Hart and J. F. C. Fuller, and the term “blitzkrieg” was actually popularized by the British press; the German military never formally adopted it.

The advancing armies in these campaigns abandoned the traditional approach of moving at the slow pace at which they could establish secure lines of supply and retreat. Instead they fully committed to an offensive strategy that accepted the possibility of running out of fuel, provisions, and ammunition, risking potentially disastrous defeat in order to maximize speed and surprise. The speed of these armies’ advance shocked and overwhelmed their opponents, allowing the blitzkriegers to outmaneuver and outfight the defending forces.

The early success of the German army helped spread the lessons of blitzkrieg to all the forces in the war. For example, the American general George S. Patton later put these lessons to good use in leading the US Third Army’s advance from the beaches of Normandy all the way to Berlin. Since then, the term “blitz” has been used to describe everything from an American football play to the way in which large corporations roll out new products. Like the all-out blitz defense in football—which involves the risky move of sending every available defender to pursue the quarterback—or the proverbial marketing blitz of television, print, and online advertising that accompanies the release of a new blockbuster movie, blitzscaling strives for a relentless and dizzying speed that overwhelms the market.

While we are wary of the negative connotations of “blitz,” especially in those nations that felt the effects of blitzkrieg in World War II, we believe that the strength of the metaphor and the widespread and colloquial use of the term in nonmilitary contexts make it the best fit for the concepts discussed in this book.

PART I
What Is Blitzscaling?

Blitzscaling is what we call both the general framework and the specific techniques that allow companies to achieve massive scale at incredible speed. If you’re growing at a rate that is so much faster than your competitors that it makes you feel uncomfortable, then hold on tight, you might be blitzscaling!

Amazon’s incredible growth in the late 1990s (and up through today) is a prime example of blitzscaling. In 1996, a pre-IPO Amazon Books had 151 employees and generated revenues of $5.1 million. By 1999, the now-public Amazon.com had grown to 7,600 employees and generated revenues of $1.64 billion. That’s a 50 times increase in staff and a 322 times increase in revenue in just three years. In 2017, Amazon had 541,900 employees and was forecast to generate revenues of $177 billion (up from $136 billion in 2016).

Dropbox founder Drew Houston described the feeling produced by this kind of growth when he told me, “It’s like harpooning a whale. The good news is, you’ve harpooned a whale. And the bad news is, you’ve harpooned a whale!”

While blitzscaling may seem desirable, it is also fraught with challenges. Blitzscaling is just about as counterintuitive as it comes. The classic approach to business strategy involves gathering information and making decisions when you can be reasonably confident of the results. Take risks, conventional wisdom says, but take calculated ones that you can both measure and afford. Implicitly, this technique prioritizes correctness and efficiency over speed.

Unfortunately, this cautious and measured approach falls apart when new technologies enable a new market or scramble an existing one.

Chris earned his MBA from Harvard Business School in the late 1990s, during the dawn of the Networked Age. Back then, his MBA training focused on traditional techniques, such as using discounted cash flow analysis to make financial decisions with greater certainty. Chris also learned about traditional manufacturing techniques, such as how to maximize the throughput of an assembly line. These methods focused on achieving efficiency and certainty, and the same emphasis was reflected in the broader business world. The world’s most valuable company during that time, General Electric, was beloved by Wall Street analysts for its ability to deliver consistent and predictable earnings growth. But efficiency and certainty, while innately appealing, and very important in the context of a stable, established market, offer little guidance to the disrupters, inventors, and innovators of the world.

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. Over the years, many have criticized Amazon for its risky strategy of consuming capital without delivering consistent profits, but Amazon is probably glad that its “inefficiency” helped it win several key markets—online retail, ebooks, and cloud computing, to name just a few.

When you blitzscale, you deliberately make decisions and commit to them even though your confidence level is substantially lower than 100 percent. You accept the risk of making the wrong decision and willingly pay the cost of significant operating inefficiencies in exchange for the ability to move faster. These risks and costs are acceptable because the risk and cost of being too slow is even greater. But blitzscaling is more than just plunging ahead blindly in an effort to “get big fast” to win the market. To mitigate the downside of the risks you take, you should try to focus them—line them up with a small number of hypotheses about how your business will develop so that you can more easily understand and monitor what drives your success or failure. You also have to be prepared to execute with more than 100 percent effort to compensate for the bets that don’t go your way.

For example, anyone who knows Jeff Bezos knows that he didn’t simply mash his foot down on the gas pedal; Amazon has intentionally invested aggressively in the future, and, despite its accounting losses, generates a ton of cash. Amazon’s operating cash flow was over $16 billion in 2016, but it spent $10 billion in investments and $4 billion paying down debt. Its seemingly meager profits are a feature of its aggressive strategy, not a bug.

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. Think of them as fuel and oxygen; you need both to propel the rocket skyward. Meanwhile, the infrastructure of your organization is the actual structure of your rocket, which you’re rebuilding on the fly as you rise. Your job as a leader and an entrepreneur is to make sure that you have sufficient fuel to propel your growth while making the necessary mechanical adjustments to the actual rocket ship to keep it from flying apart as it accelerates.

Fortunately, this is more possible today than it has ever been in the past.

SOFTWARE IS EATING (AND SAVING) THE WORLD

Historically, stories of breakneck growth involved either computer software, which offers nearly unlimited scalability in terms of distribution, or software-enabled hardware, such as the Fitbit fitness tracker or Tesla electric car, whose software component allows the company to innovate on software timescales (days or weeks) rather than hardware timescales (years). Moreover, the speed and flexibility of software development allow companies to iterate and recover from the inevitable missteps of haste.

What’s especially exciting these days is that software and software-enabled companies are starting to dominate industries outside of traditional high tech. My friend Marc Andreessen has argued that “software is eating the world.” What he means is that even industries that focus on physical products (atoms) are integrating with software (bits). Tesla makes cars (atoms), but a software update (bits) can upgrade the acceleration of those cars and add an autopilot overnight.

The spread of software and computing into every industry, along with the dense networks that connect us all, means that the lessons of blitzscaling are becoming more relevant and easier to implement, even in mature or low-tech industries. To use a computing metaphor, technology is accelerating the world’s “clock speed” (the rate at which Central Processing Units [CPUs] operate), making change occur faster than previously thought possible. Not only is the world moving faster, but the speed at which major new technology platforms are being created is reducing the downtime between the arrivals of each wave of innovation. Before, individual waves would sweep through the economy one at a time—technologies like personal computers, disk drives, and CD-ROMs. Today, multiple major waves seem to be arriving simultaneously—technologies like the cloud, AI, AR/VR, not to mention more esoteric projects like supersonic planes and hyperloops. What’s more, rather than being concentrated narrowly in a personal computer industry that was essentially a niche market, today’s new technologies impact nearly every part of the economy, creating many new opportunities.

This trend holds tremendous promise. Precision medicine will use computing power to revolutionize health care. Smart grids use software to dramatically improve power efficiency and enable the spread of renewable energy sources like solar roofs. And computational biology might allow us to improve life itself. Blitzscaling can help these advances spread and magnify their sorely needed impact.

THE TYPES OF SCALING

Blitzscaling isn’t simply a matter of rapid growth. Every company is obsessed with growth. In any industry, you live and die by the numbers—user acquisition, margins, growth rate, and so on. Yet growth alone is not blitzscaling. Rather, blitzscaling is prioritizing speed over efficiency in the face of uncertainty. We can better understand blitzscaling by comparing it to other forms of rapid growth.

Classic start-up growth prioritizes efficiency in the face of uncertainty. Starting a company is like jumping off a cliff and assembling an airplane on the way down; being resource-efficient lets you “glide” to minimize the rate of descent, giving you the time to learn things about your market, technology, and team before you hit the ground. This kind of controlled, efficient growth reduces uncertainty and is a good strategy to follow while you’re trying to establish certainty around what the authors Eric Ries and Steve Blank call product/market fit: your product satisfies a strong market demand for the solution to a specific problem or need.

Classic scale-up growth focuses on growing efficiently once the company has achieved certainty about the environment. This approach reflects classic corporate management techniques, such as applying “hurdle rates” so that the return on investment (ROI) of corporate projects consistently exceeds the cost of capital. This kind of optimization is a good strategy to follow when you’re trying to maximize returns in an established, stable market.

Fastscaling means that you’re willing to sacrifice efficiency for the sake of increasing your growth rate. However, because fastscaling takes place in an environment of certainty, the costs are well understood and predictable. Fastscaling is a good strategy for gaining market share or trying to achieve revenue milestones. Indeed, the financial services industry is often happy to finance fastscaling, whether by buying stocks and bonds or lending money. Analysts and bankers feel confident that they can create elaborate financial models that work out to the penny the likely ROI of a fastscaling investment.

Blitzscaling means that you’re willing to sacrifice efficiency for speed, but without waiting to achieve certainty on whether the sacrifice will pay off. If classic start-up growth is about slowing your rate of descent as you try to assemble your plane, blitzscaling is about assembling that plane faster, then strapping on and igniting a set of jet engines (and possibly their afterburners) while you’re still building the wings. It’s “do or die,” with either success or death occurring in a remarkably short time.

Given these definitions, you might wonder why anyone would ever pursue blitzscaling. After all, it combines the gut-wrenching uncertainty of start-up growth with the potential for a much bigger, more embarrassing, more consequential failure. Blitzscaling is also hard to implement. Unless you’re like Microsoft or Google and can finance your growth from an exponentially growing revenue stream, you’ll need to convince investors to give you money, and it’s much harder to raise money from investors for a calculated gamble (blitzscaling) than for a sure thing (fastscaling). To make matters worse, you usually need more money to blitzscale than to fastscale, because you have to keep enough capital in reserve to recover from the many mistakes you’re likely to make along the way.

Yet despite all of these potential pitfalls, blitzscaling remains a powerful tool for entrepreneurs and other business leaders. If you’re willing to accept the risks of blitzscaling when others aren’t, you’ll be able to move faster than they will. If the prize to be won is big enough, and the competition to win it is intense enough, blitzscaling becomes a rational, even optimal strategy.

Once you convince the market for capital and the market for talent—which include clients and partners, as well as employees—to invest in your scale-up, you have the fuel required to start blitzscaling. At that point, your objective switches from going from zero to one to going from one to one billion in an incredibly compressed time frame.

A company might employ different types of scaling at different points in its life cycle. The canonical sequence that companies like Google and Facebook have gone through begins with classic start-up growth while establishing product/market fit, then shifts into blitzscaling to achieve critical mass and/or market dominance ahead of the competition, then relaxes down to fastscaling as the business matures, and finally downshifts to classic scale-up growth when the company is an established industry leader. Together, this sequence of scaling generates a classic “S-curve” of growth, with slower initial growth followed by rapid acceleration, eventually easing its way into a gentle plateau.

Of course, this canonical sequence is greatly simplified. The scaling cycle applies not just to whole companies but to individual products and business lines; the aggregate curves of these scaling cycles generate the overall scaling curve for the company.

For example, Facebook began as a classic blitzscaling story. The year-over-year revenue growth during its first few years of existence were 2,150 percent, 433 percent, and 219 percent, going from zero to $153 million in revenue in 2007. Then the company went through a key transition, and growth dropped into the double-digit range as Facebook struggled with both monetization and the shift from desktop to mobile. Fortunately, Facebook founder Mark Zuckerberg made two important moves: he personally led a shift from desktop-first to mobile-first, and he hired Sheryl Sandberg as the company’s COO, who in turn built Facebook into an advertising sales juggernaut. Growth rose back into the triple-digit range, and, by 2010, these moves had pushed Facebook’s revenues to over $2 billion. We’ll examine both of these key moves in greater detail later in the book, with Facebook’s shift to mobile featured in our analysis of Facebook’s business model, and Facebook’s hiring of Sheryl Sandberg in the section on the key transition from contributors to managers to executives.

Apple illustrates how this overlap looks over multiple decades. In its storied history, Apple went through complete scaling cycles for the Apple II, the Macintosh, the iMac, and the iPod (with the cycle for the iPhone still under way). It’s worth noting that Apple failed to launch any blitzscalable products after the Apple II and the Mac until Steve Jobs returned and launched the iMac, iPod, and iPhone. It was part of Steve’s rare genius that time and time again he was able to pick the right product for Apple to blitzscale, even without slowing down for a period of classic start-up growth to gather feedback from the market.

The scaling curve applies to every blitzscaler, regardless of industry or geography. The same multiple S-curve graph that describes Facebook or Apple also describes Tencent, which launched with QQ, then added a second curve for WeChat after QQ reached maturity in 2010. Just when you’ve finished blitzscaling one business line, you need to blitzscale the next to maintain your company’s upward trajectory. And as blitzscaling continues to spread, established companies with mature business lines should consider turning to intrapreneurs to blitzscale new business units.