WIRED and Executive in Residence and faculty member at Columbia Business School, Leonard Sherman, published a great look today at the implication of substantial rounds of investment going into young companies. The idea behind the intent, known as Blitzscaling, is to fuel such innovations substantially enough that they can establish a global market share and competitive advantage quickly enough (critics argue, by way of capital alone), that they theoretically won’t (or can’t) fail.
It goes without saying, the downside of blitzscaling on which I think we can all agree, is that it brings to life substantial and impactful companies that may not have worked out all the kinks; shining the spotlights we’ve experienced in recent years on founders, teams, cultures, or innovations that we might not all think have the best intentions in mind. Regardless, it happens and thus the question, is ‘Blitzscaling’ choking innovation?
Maybe ‘Blitzscaling’ is Choking Innovation and Wasting Money
Popularized by LinkedIn founder Reid Hoffman and Wasabi Ventures Global Partner Chris Yeh in the book of the same name, Blitzscaling, is explored as the “lightning-fast path to building massively valuable companies.”
As I read Sherman’s article, I couldn’t help but chew on the question from different points of view. I’m not here going to elaborate on Sherman’s thoughts, his perspective is well thought and worth a read directly. I wanted to take a moment to explore the implication and offer a different perspective.
In fairness, and complete accuracy, there are two sides to the coin; Blitzscaling is sensational and it intrigues people so it’s an idea ripe for speculation and criticism. But does it really stifle innovation and waste money or does it defer it and enable future potential? I’d argue both.
In favor of criticism of Blitzscaling
Bigger bets on fewer things does stifle completely new ideas. Such focus is rather like Corporate Innovation or University R&D… bigger budgets and brands on the line means risk are taken more methodically and opportunities less certain are shelved or ignored rather than explored and pivoted. Globally, we’re still in era of catching up with the *average* degree of internet experience on the U.S. coasts – that means investors are favoring more assurance and confidence in investments – capital can’t be certain that the people, regional partners, mentors, etc. *really* know how things work so they make safer/bigger bets.
Whether it wastes money or not is debatable. Innovation is high risk. New business is high risk. By definition, venture capital investment requires a tremendous amount of lost capital. This is why is seeks far greater than average outcomes (to the chagrin of many); it has to make up for the investments lost — but investments necessary in our economy because that fuels new ideas, experience, and even technologies that get re-purposed.
And yet, the Impact of Blitzscaling
The idea that it’s choking innovation is incomplete. It’s a tough notion to swallow but the word blitz likely draws from the use of it in WWII and how the Allies stormed with overwhelming force. The horrific implications of war and destruction should be no means be belittled but it’s the other implication that also has merit: economies pushed into overdrive and rebuilding efforts that spun new eras of prosperity and technology.
While it blitzscaling stifles new entrepreneurship and the fuel for countless new ideas, it does do three other things:
1. It completely transforms industries and economies. Startups don’t change our world, disruptive companies do. Startups MIGHT (don’t misunderstand my point!); but startup is a stage, not a company. Startups have the potential to change the world. It takes a well funded and substantial company to actually do it. See: AOL, Google, Facebook, Uber, Salesforce, etc.
Smaller bets = more variety and potential in innovation
Bigger bets = more impactful innovation
2. Bigger bets establish innovative companies and while those companies end up innovating slowly, they are from where future innovators come.
The average age of successful entrepreneurship is 40. People trying out startups for 20 years before they get it right. These are people who cut their teeth at innovative companies earlier in their career. You’ve heard of the PayPal mafia? Did you know that the CEO of LinkedIn, hundreds of VCs, and executives involved in Groupon, Change.org, and more, all started out at good old Yahoo? There is a conventional wisdom in innovation that you don’t learn entrepreneurship at a University (in fact, we can point to many huge ventures a result of people dropping out of college); you get your “startup MBA” (if you will) by getting a job in innovation and seeding your future from there.
Smaller bets = enable present innovators to try
Bigger bets = enable future innovators when more likely to succeed
3. Bigger bets create wealth and corporate resources. From where will the capital for today’s startups come? With whom will today’s startups partner? With whom will today’s startups exit?
Kapor Capital, one of the world’s leading social impact investment groups, is largely a result of Uber. Big bet made that resulted in untold opportunity for others.
How many of you plan to get acquired by AOL or Yahoo? No one, right? We’ve moved on, and it’s newer major companies, the result of big bets, that provide opportunity for present startups to consider meaningful corporate partnerships or exit paths.
Startups and early entrepreneurship are not merely the result of Venture Capital!
We all need companies in our spaces, companies that enable for us mentors, angel investors, experience team members, partnerships, and bigger customers so that our work and risk as entrepreneurs is recognized and rewarded more promptly than that fat check that might, in months, come from a venture capital firm placing a small bet.
Instead of an image of the start of a slow campaign, here’s an image of actual blitzkrieg (i.e. swift, not slow) operations. Just sayin:)
Strikes me that though the notion is lightening fast, the implication in business is more overwhelming force.
Might need a better military term to co-opt then, because the German blitzkrieg tactics did not rely on overwhelming force (e.g. they had less tanks than France when they invaded them). Instead, blitzkrieg relied on swift actions directed at a decisive point.
just typing whatever here so i can read this later 🙂
I appreciate that more than just typing “whatever” here LOL
Paul O’Brien superb deep dive!
Thanks Kenneth Holley. In my limited world view, this strikes at the very heart of how and why there is such disparity between “Silicon Valley” and elsewhere.
Ironically, this is exactly what startups are supposed to fight – enterprises that try to defend their moats with money instead of ideas.
I think you have it right with “overwhelming force” Paul O’Brien and Phillip Philip Wheat. Amazon and, to a lesser extent, Google are both examples of blitzscaling, IMO. How many years did Amazon lose money before it became what it is? Without overwhelming amounts of cash, it wouldn’t be here. They did move rapidly at times, but it was all on a fast moving river of cash.
Ditto Tesla. I won’t go into a PhD dissertation on powertrains here, but there is room for substantial improvement in Tesla’s powertrain architecture that won’t happen due to the capital momentum behind what they have.
Tough reading above article, without referring to original Wired article. My 2 cents. In general, let the business people do what they do, with a few exceptions. That is, whether investors want to invest in blitzscaling companies or not, go ahead
One of the exceptions is monopolies. Here, I don’t know what to say. A company as Linkedin is a blitzscaled company (read the book– the founders were throwing out millions of dollars per day, to build critical mass). Yes, a monopoly was created in business networking through bltizscaling, and if one uses Linkedin, it is boring and lacking in social and technical finess. We let investors use blitzscaling’s billions of dollars create a boring website monopoly? I say, let’s get rid of this monopoly.
Yet, Linkedin is a USA monopoly on the rest of the world. So, blitzscaling’s monopolies did help the USA as well.
Tesla will make it as a car company for a while, but I don’t think it’ll ever become a monopoly for reasons I gave in earlier postings. So, let it die slowly.
Overall, I believe the right thing to do remains to let the free market business investors decisions continue, and let anti-monopoly and SEC regulations continue as well.
Also, I don’t know how long these boring blitzscaled websites will really last–which affects how much did they contribute to society. Microsoft bought Linkedin– another possible failure source. But will Linkedin be as influential in 10 years, or will another innovation take over? I personally am working on a competiting technology, and there are many in the crypto identity also working on such technologies.
But, we have to admit, from an investors perspective, blitzscaling Linkedin in did pay off in formation of monopoly. Maybe less valuable from a societal perspective.
Good points but I’m a vocal critic about the idea that a monopoly is so merely because it dominates the market. LinkedIn isn’t a monopoly, there is nothing preventing anything or anyone else from unseating LinkedIn. Monopolies are enabled by government, not prevented by regulations.
Granted, I appreciate that we can debate and that many have differing opinions but there is VAST difference between the “monopoly” of LinkedIn and the literal monopoly of Austin Energy.
AT&T had/has monopolies in cable or phone service. Healthcare providers and insurance often has monopolies in what they provide. Amtrack has a monopoly in Texas which prevents others from using those lines for commuter rail.
There is nothing free market about those situations, the government prevents competition.
Investors and a business largely owning a market isn’t a monopoly. It’s a competitive advantage to be sure. Companies with market share and war chests die all the time.
Social media websites, such as Linkedin and Facebook, are some of the biggest monopolies anywhere due to the networking effect. Such effect creates exponential collaboration and association with each additional member. And these websites networking effects are global; thus creating some of the largest monopolies ever in history.
There are, as you pointed out, many local utilities monopolies, which are created because a municipality needs a critical mass for such service. For example, a power plant is expensive and the community can’t afford two. These are usually regulated.
Amtrack’s competition are buses, planes, and cars.
ATT does not have a monopoly, and its monopoly was rightfully broken up. Incidentally, ATT was also an example where the nteworking effect helped create the monopoly.
The main social media websites are some of the biggest monopolies the world has ever seen due to the networking effect. And they are some of the most powerful monopolies ever.
Due to the networking effect, the quality of competitors’ services is, for the most part irrelevant. For example, many people here can create a better Linkedin website. But who will participate?
Even the billions and promotions availabe for Google+ has difficulty competing the Facebook monopoly. Facebook is probably the biggest monopoly in the world presently.
Facebook coding can probably be recreated for less than $5 million. If I offered a Facebook clone, with free services, and half price advertising costs for advertisers, how many would participate? Very very few. This is an example of monopoly– same product, half the price, and no buyers due to monopoly competition.
The overarching money pump also comes with the ability to anti-pump and stiffle or kill impending competition…
just ask Amazon how this works
Thanks for following up my Wired article on blitzscaling. I Googled my article for reference this morning and your blog came up first on my search page. Your SEO is working well!
Len, you wrote a great piece, thank you! The two perspectives sparked some great discussion throughout the Texas startup groups where there really is this duality to entrepreneurs’ point of view – and it’s a duality that is causing some challenges that I believe exist throughout the world; that, neither approach is wrong per se, rather, aligning expectations to one or the other is critical (and challenging). Here’s one of the threads if you’d like to jump in: https://www.facebook.com/groups/startups.texas/permalink/2198600646902354/
It’s a good question. Particularly, as we can see measure better it’s implementation and results.