Tim O’Reilly wrote a great response to the most recent episode of Masters of Scale, “The Money Episode”. Tim’s LinkedIn Influencer post, “Some Businesses Bleed Black”, adds nuance and complexity to the philosophy that startups should raise more money than they think they need.
As Tim points out, there is definitely a continuum between the all-out growth of blitzscaling, and the stability of a lifestyle business. Tim is absolutely right that there are great businesses that discover a great revenue source, and can use customers to fund their growth. There are also great businesses that do raise outside funding, but whose revenue model enables them to achieve massive scale without ever raising the large amounts of capital that are typically required for blitzscaling. But do these exceptions invalidate my theory? In a word, no.
Tim’s preferred strategy of focusing on sustainable cash flow and growing at the rate that customers are willing to fund with their purchases is generally a good approach, but it isn’t universal, especially when it comes to technology companies.
Many technology businesses exist in winner-take-most or winner-take-all markets, where the first company to achieve critical scale wins a massive long-term advantage. Furthermore, many of these markets include well-funded competitors; if you focus on sustainable growth, you might be highly efficient in the short term, but if your inefficient and free-spending competitors beat you to critical mass, you’ll still be dead in the long term. In these markets, time really is your enemy, not your ally.
When Rocket Internet decided to spend a hundred million dollars trying to beat Airbnb to scale in Europe, the right play for Brian Chesky wasn’t to focus on profitable growth; it was to raise money and grow faster than his rival.
One of the key elements of my upcoming book on blitzscaling is a set of guidelines to help you assess when it makes sense to prioritize speed to growth over efficiency, and when it makes sense to prioritize efficiency over speed.
If, like Tim, you’re working in an industry without venture capitalists to provide your competitors with a blitzscaling war chest, or if you’re one of the rare companies like Google that has a business model so profitable that it supports explosive growth, funding your growth from revenues may very well be the right choice. Of course one of the main reasons Google was able to pursue the course it did was that by the time it launched, most smart people believed that that search engines weren’t an good business, and so it was able to grow without focused competition. People were so down on search that in 2002, Yahoo, which should have been Google’s biggest rival, signed a deal to outsource its search to Google! These aren’t common circumstances.
Just look at the list of major bootstrapped technology companies that Tim cites in his post—do you know what they also all have in common? None of them were started in Silicon Valley. Microsoft (Albuquerque, 1972), Bloomberg (New York, 1983), ESRI (Redlands, 1969), Epic Systems (Madison, 1979), SAS (North Carolina, 1976), and Dell (Austin, 1984) all had the space to grow without blitzscaling competitors (and Bloomberg started with $10 million from Michael Bloomberg’s personal fortune, and took a $30 million investment from Merrill Lynch).
There are many more instances of successful technology businesses that have taken significant venture financing, than have not. Just in my own personal experience, PayPal, LinkedIn, Facebook, and Airbnb all benefited from raising significant amounts of capital. Most of today’s other important technology companies did as well, including Apple, Amazon, Alibaba, Tencent, Oracle, Cisco, Intel, Salesforce.com, Workday, and many more.
Tim is both a good friend and a savvy businessman. Of course he’s right that there’s entire categories of businesses that don’t need to raise blitzscaling capital, and even some great technology companies that succeeded without it. But if you over-index on those exceptions and decide you shouldn’t raise money, you would have missed out on the majority of multi-billion-dollar successes, especially in Silicon Valley.
As always, key decisions about building great businesses involve judgment. In blitzscaling, the judgments are challenging: significant deployment of capital, vision-blurring speed, unresolvable risks, and short-fused decisions in time. Some of the challenging questions that you must ask:
- When must you make the blitzscale, blitz-capital decision? Do you face actual competition? Potential competition? What is the availability of capital for you and competitors? Do you need to achieve critical mass for a valuable network product?
- When can you build more carefully and deliberately? Establish a product-market fit and revenue model, limiting those risks carefully?
If you have experiences or thoughts on this dialogue between Tim and me, please share! Comment below, or share on LinkedIn / Facebook / Twitter using #mastersofscale.
You can listen to the episode Tim wrote about, as well as many others, and subscribe to my podcast at https://mastersofscale.com/.