Blitzcapital — sometimes crazy, sometimes essential to great technology businesses
Photo: iStock.com/Madmaxer

Blitzcapital — sometimes crazy, sometimes essential to great technology businesses

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/.

Derrick A. Small

General Partner of EINTAC L.P. Community Growth Firm. Ambassador for Daymond John / Sponsored by Robinhood.

6y
Like
Reply
Gordon RAY

Lecturer In Management, Technology, Strategy (MTS) at Grenoble Ecole de Management

6y

"I'd love to see more entrepreneurs seeking out markets where time is an ally, not an enemy. This would require them to seek out new, underserved markets, where, like Google in 1998, everyone wasn't chasing variations of the same vision." Me, too! This is where the most important innovation will happen. Agriculture and food production are ripe for this. After reading Dan Barber's book "The Third Plate: Field Notes on the Future of Food," I see enormous potential for positive disruption (healthier AND more effective) in wheat production & processing alone. Massive worldwide market, and that's just one of many. Thanks for posting!

Like
Reply

I totally agree that in winner-takes-all markets, blitzscaling is the right strategy. I just hate to see every entrepreneur told that this is the only way to win. After all, by definition, in winner-takes-all markets, there are only one or (at most) two winners. Which, by definition, means that if you're in a hotly contested market, you lose no matter how much money you raise. It is necessary, but not sufficient. I'd love to see more entrepreneurs seeking out markets where time is an ally, not an enemy. This would require them to seek out new, underserved markets, where, like Google in 1998, everyone wasn't chasing variations of the same vision. I have an extended chapter titled "Supermoney" in my forthcoming book, WTF: What's the Future and Why It's Up to Us (Harper Business, October 2017), which lays out the pluses and minuses of raising large amounts of capital, especially from the perspective of the impact of the blitzscaling/supermoney approach on the economy. I believe that the proper role of raising large amounts of money is not to beat the competition, but to do things that would otherwise be impossible. Elon Musk and Jeff Bezos have both been masters of leveraging huge amounts of money to make big investments in hard things. I find that a much better reason to raise lots of money than just "winning." As Rilke once wrote: "What we fight with is so small, and when we win, it makes us small." Your advice is the right advice for Silicon Valley, Reid, but entrepreneurs should also be reminded that there is a whole world of possibility in business that does not follow the Silicon Valley playbook. We should do a public discussion on this topic sometime, Reid! It would be fun.

Farhad Popal

CEO and Founder of adfall.com

6y

Mr. Hoffman, I have launched my app called adfall a little over a month ago... I was wondering if you had a few min to give me some advise plz..??

Like
Reply
Jose Merino

CEO - Rewire Holding

6y

Agree with most of your and Tim's comments however in my personal experience being in Europe, the access to US funding for blitz-growth is not really that accessible. A lot of incredible startups in Europe, like my own, could have been billion $ firms if substantial US investment was made available. Why not make it a condition of the substantial investment rounds in Europe to move the HQ to the US, closer to the investors as a guideline?

To view or add a comment, sign in

Insights from the community

Explore topics