Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies. Reid Hoffman
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Over the course of this book, we’ll see how business model, growth strategy, and management innovation work together to form the high-risk, high-reward process of blitzscaling.
Of the three core techniques of blitzscaling, the first and most foundational is to design an innovative business model capable of exponential growth.
The story of entrepreneurship in the Internet era is a story of this kind of business model innovation.
Think back to the dot-com era, which stretched roughly from the IPO of Netscape in 1995 until the NASDAQ began to crash in 2000. During this period, enormous numbers of start-ups and pretty much every established company tried to build great Internet businesses, yet nearly all of them failed. The problem was, most of them simply tried to cut and paste existing business models onto the new online medium. You can’t transplant a heart from one species into another and expect it to thrive.
If you had asked stock market analysts in 1995 which companies were best positioned to dominate the Internet, most would have pointed to existing giants like Microsoft and Time Warner, which invested millions in Internet businesses like MSN and Pathfinder. Others would have mentioned “pure play” dot-com start-ups like eToys, which combined proven business models like the “category killer” store with the new online medium.
Yet when the wreckage of the dot-com crash cleared, the most successful companies still charging full steam ahead were the few start-ups that were designed around totally new business models, such as Amazon, eBay, and Google.
Walmart should have dominated online retail, yet Amazon emerged and practically wrote the bible for e-commerce, including consumer reviews, shopping carts, and free shipping. Newspapers and phone book companies should have been able to transfer their information businesses to the online world, but Yahoo! and then Google stepped up to the plate. They built the search engines that indexed the world’s information, and Google developed the business model that made it worth more than all traditional media companies combined.
In contrast, and much to their misfortune, start-ups that relied purely on technology innovation without any real business model innovation largely went bust. Companies like eToys that tried to “Amazon” various markets, but without Amazon’s front- and back-office innovations, crashed and burned once the financial markets began to demand profits rather than just expensive revenue growth. Even Netscape, whose Netscape Navigator mainstreamed Web browsing, and whose IPO kicked off the dot-com boom, was forced to sell itself off to AOL. Netscape engineers invented JavaScript, SSL, and all kinds of cool technology for the Internet that are still used today, but Netscape accepted the status quo when it came to using tried-and-true business models rather than developing new ones that were enabled by its own technology innovation. Unfortunately for Netscape, its competitor Microsoft already understood those business models all too well and knew exactly how to use its economic might and resources to pull their levers. In the first “browser war,” Microsoft preinstalled its Internet Explorer on all new Windows computers, then gave away its Web server software, Internet Information Server (IIS), which effectively destroyed Netscape’s business model.
Could Netscape have succeeded with a different strategy? We believe so. Consider that one of the ways that Netscape monetized its Navigator browser was to sell the sponsorship of its Net Search button to the Excite search engine for $5 million. Netscape believed that the browser itself was the key, while search was simply a sideline. It was left to two pairs of Stanford graduate students, Jerry Yang and David Filo (Yahoo!) and Larry Page and Sergey Brin (Google), to prove that search was a much bigger business. Google’s innovative model of selling text ads next to search results via an automated marketplace allowed it to build a franchise so dominant that it later withstood a series of frontal assaults by Microsoft, including a marketing program in which Microsoft essentially paid people to use its Bing search engine.
The same story has been repeated in multiple waves since. Facebook and LinkedIn dominate social networks even though AOL, Microsoft (Hotmail), and Yahoo! (Yahoo! Mail) controlled most consumer online identities when those social networks first emerged. Alibaba beat eBay in China. Uber outflanked the taxi companies. Airbnb has more room listings than any hotel company in the world.
These success stories are technology companies, sure. But as we’ve seen, technological innovation alone is insufficient—even when its impact on the future is huge. Services like Craigslist, Wikipedia, and IMDb (the Internet Movie Database) were early, influential Internet innovators, but they still never became massively (financially) valuable on their own.
The real value creation comes when innovative technology enables innovative products and services with innovative business models. Even though the business models of Google, Alibaba, and Facebook might seem obvious—even inevitable—after the fact, they weren’t widely appreciated at the time they launched. How many people in 1999 would have realized that running tiny text ads next to the equivalent of an electronic card catalog would lead to the world’s most valuable software company? Or that setting up an online shopping mall for China’s emerging middle class would lead to a $100 billion business? Which of you in 2004 would have predicted that letting people see what their friends are talking about by staring at a tiny screen on a handheld computer would become the dominant form of media? Great companies and great businesses often seem to be bad ideas when they first appear because business model innovations—by their very definition—can’t point to a proven business model to demonstrate why they’ll work.
To really understand why these business models succeed, we need to clearly define what we mean by “business model” in the first place. Part of the problem is that the term can be interpreted in so many different ways. The great management thinker Peter Drucker wrote that business models are essentially theories composed of assumptions about the business, which circumstances might require to change over time. Harvard Business School professor and author Clay Christensen believes that you need to focus on the concept of the “job-to-be-done”; that is, when a customer buys a product, she is “hiring” it to do a particular job. Then there’s Brian Chesky of Airbnb, who said simply, “Build a product people love. Hire amazing people. What else is there to do? Everything else is fake work.”
As Andrea Ovans aptly put it in her January 2015 Harvard Business Review article, “What Is a Business Model?”, it’s enough to make your head swim! For the purposes of this book, we’ll focus on the basic definition: a company’s business model describes how it generates financial returns by producing, selling, and supporting its products.
What sets companies like Amazon, Google, and Facebook apart, even from other successful high-tech companies, is that they have consistently been able to design and execute business models with characteristics that allow them to quickly achieve massive scale and sustainable competitive advantage. Of course, there isn’t a single perfect business model that works for every company, and trying to find one is a waste of time. But most great business models have certain characteristics in common. If you want to find your best business model, you should try to design one that maximizes four key growth factors and minimizes two key growth limiters.
DESIGNING TO MAXIMIZE GROWTH: THE FOUR GROWTH FACTORS
GROWTH FACTOR #1: MARKET SIZE
The most basic growth factor to consider for your business model is market size. This focus on market size may sound obvious, and it’s right out of Pitch Deck 101 for start-ups, but if you want to build a massive company, you need to begin with the basics and eliminate ideas that serve too small of a market.
A big market has both a large number of potential customers and a variety of efficient channels for reaching those customers. That last point is important; a market consisting of “everyone in the world” might seem large, but it isn’t reachable