Last year at Stanford University, Reid Hoffman, Allen Blue, Chris Yeh & I taught a class on entrepreneurship at Stanford called “Blitzscaling” — a strategy in which a company (most often technology companies here in San Francisco & Silicon Valley) pursues unusually high rates of growth in a way that’s tactically inefficient in terms of capital and other resources, but strategically essential to capitalizing on a large and attractive market opportunity.
The class went well, and included tons of amazing insights from guests like Eric Schmidt, Marissa Mayer, Reed Hastings and Sam Altman, plus many others.
“But wait!”, you think — it’s 2016 now — isn’t the era of crazy growth over? Aren’t we back to a more sober time?
The recent turmoil in the markets that has affected many technology companies — both public and private — may indeed lead some to conclude that the aggressive pursuit of growth needs be restricted to buoyant markets. But even today, those who choose to limit their pursuit of growth to favorable market conditions are forgoing potentially valuable opportunities.
The key nuance to keep in mind during these mixed market conditions is that a company’s rate of growth needs to be measured on a relative — rather than absolute — scale. In a rapidly growing market, a company that grows 100% per year might be losing share; during turbulent times, a company that grows 50% per year might be gaining enough share to achieve market dominance. You can successfully blitzscale in good times, and you can successfully blitzscale in bad times. But you can’t and probably shouldn’t blitzscale all the time.
Companies should adopt a strategy of blitzscaling when tackling a market in which becoming the first player to achieve scale confers strong and lasting competitive advantages. Blitzscaling is unlikely to prove successful if another company has already achieved the “first-scaler” advantage, or if the market itself doesn’t offer compelling sources of lasting competitive advantages, such as network effects. During the Dot Com era, both Amazon and Yahoo attempted frontal assaults on eBay’s auction business, but the network effects of eBay’s two-sided marketplace of buyers and sellers meant that its first scaler advantage was too strong to overcome — and so eBay dominated their important market for decades.
Lots of mistakes get made for sure — some companies believe they’re in a winner take all space when it turns out they’re in a commodity space — in which case blitzscaling is a disastrous strategy to employ.
Opportunity is the primary factor when considering whether to blitzscale. It is only after a company discovers an untapped and attractive market opportunity where being first to scale confers lasting competitive advantage that it should attempt to ascertain whether it has the ability to access or acquire the capital and talent necessary to support a sustained blitzscaling campaign.
During the depths of the Dot Com bust, Google followed the blitzscaling playbook by using a distribution deal with AOL to dramatically expand its AdWords business. The deal, first announced in May 2002, gave AOL an 85% share of the revenue generated by AOL searches powered by Google, with a guaranteed minimum of $150,000,000 per year. At the time, Google, had less than 1/10th that amount in the bank. This may have seemed risky, given that the NASDAQ had fallen nearly 80% from its high two years earlier, and it is precisely this perceived risk that probably allowed Google to outbid the incumbent providers, the publicly-traded Overture and Inktomi. Yet while both the revenue share and guarantee were highly aggressive, Google’s improved AdWords algorithms made the deal highly profitable for both parties, and the move allowed Google to increase its revenues from roughly $19 million pre-AOL in 2001 to $347 million post-AOL in 2003.
No one can say with certainty what 2016 and beyond will hold — but hopefully you’ll find as much wisdom from the guests in our Blitzscaling class as we have — incredible thoughtfulness on when to push on the accelerator and how.
Hope you enjoy the podcasts!
Though in-class participation of our blitzscaling course was limited to 100 students, we wanted to make the lectures accessible to anyone who wants to learn more about starting and rapidly scaling a tech company. In addition to the podcasts, here are other ways you can experience the class:
YouTube and SlideShare | Videos and Decks
Medium | Class Notes
Chris Yeh and Greylock’s Community Manager Chris McCann wrote summaries following each class, which can be found in Greylock’s Medium collection “Blitzscaling: Class Notes and Essays.”
Medium | Student Essays
If you’re interested in reading some student perspectives, we have another collection on Medium where class members submitted homework assignments mostly consisting of short posts reflecting on themes from the class. Some really great submissions here, which are worth a read.