Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies

by Reid Hoffman

In contrast, and much to their misfortune, start-ups that relied purely on technology innovation without any real business model innovation largely went bust.

The real value creation comes when innovative technology enables innovative products and services with innovative business models.

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.

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.”

definition: a company’s business model describes how it generates financial returns by producing, selling, and supporting its products.

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.

strong pressure on entrepreneurs to focus on ideas that are going after big markets.

To deliver these above-market returns, venture capital funds need to at least triple their investors’ money.

typical seven- to ten-year life of a fund to achieve an above-market internal rate of return of 15 to 22 percent.

If a company can’t achieve “venture scale” (generally, a market of at least $1 billion in annual sales), then most VCs won’t invest, even if it is a good business.

When evaluating market size, it’s also critical to try to account for how lower costs and product improvements can expand markets by appealing to new customers,

“Sizing the market for a disruptor based on an incumbent’s market is like sizing a car industry off how many horses there were in 1910.”

“Every billion-dollar business started as a ten-million-dollar business.”

good product with great distribution will almost always beat a great product with poor distribution.

You have to be good at building a product, then you have to be just as good at getting users, then you have to be just as good at building a business model. If you’re missing any of the links in the chain, the whole chain is broken.

leveraging existing networks can be a critical part of a business model, especially if these networks can provide a “booster rocket” that is later supplemented with virality or network effects.

figuring out how to improve organic virality; that is, how to make it easier for existing users to invite friends to use the service.

Virality almost always requires a product that is either free or freemium (i.e., free up to a certain point, after which the user has to pay to upgrade—Dropbox, for example, offers 2 GB of free storage).

We can’t recall a single instance of a company that grew to a massive scale by leveraging the virality of a paid product.

Gross margins, which represent sales minus the cost of goods sold, are probably the best measure of long-term unit economics.

The higher the gross margin, the more valuable each dollar of sales is to the company because it means that for each dollar of sales, the company has more cash available to fund growth and expansion.

Most of the valuable companies we’re focusing on in this book have gross margins of over 60, 70, or even 80 percent.

high-gross-margin businesses are attractive to investors, who will often pay a premium for the cash-generating power of such a business.

Selling more copies of the same piece of software (with zero incremental costs) is a business that scales nicely.”

lowers the cost of capital when the company is publicly traded.

deliberately price their products to maximize market share rather than gross margins.

All other factors being equal, investors almost always place a much higher value on companies with higher potential gross margins than companies that have already maximized their realized gross margins.

Finally, most of a company’s operational challenges scale based on revenues or unit sales volume, not gross margin.

Designing a high-gross-margin business model makes your chances of success greater and the rewards of success even greater. As we’ll see in a later section, high gross margins have helped even nontech businesses, such as the Spanish clothing retailer Zara, grow into global giants.

A product or service is subject to positive network effects when increased usage by any user increases the value of the product or service for other users.

Economists refer to these effects as “demand-side economies of scale” or, more generally, “positive externalities.”

Economists would say that the business has to get past the “tipping point” where the demand curve intersects with the supply curve.

the bet is that losing money in the short term may allow you to make money in the long term, once you’re past the tipping point.

The value users place on the service when deciding whether or not to adopt it depends on both the current level of adoption and their expectations for future adoption. If they think others are going to jump on board, the perceived value of the service increases, and they become more likely to adopt it.

Moore argues that technology companies often run into problems when they try to transition from a market of early adopters to the mainstream—the proverbial “chasm.”

This also explains why the growth factor of distribution is as or more important to company success as the product itself—without distribution, it is difficult to reach the tipping point.

Finally, the remarkable profitability of these companies gives them the financial resources to expand into new fields and invest in the future.

Unfortunately, it’s far easier to define product/market fit than it is to establish it!

When you start a new company, the key product/market fit question you need to answer is whether you have discovered a nonobvious market opportunity where you have a unique advantage or approach, and one that competing players won’t see until you’ve had a chance to build a healthy lead. It’s usually difficult to find such an opportunity in a “hot” space; if an opportunity is obvious to everyone, the chance that you’ll be the one who succeeds is exceedingly low.

The Alliance. Even a small group of founders is likely to have a huge collective personal network of smart people with relevant knowledge or experience. Initiate a conversation, inviting them to challenge your idea and tell you what else you should consider.

But entrepreneurs can and should do their research, and try to design their business model to maximize their chances of achieving product/market fit as quickly as possible.

Designing a scalable economic model isn’t enough if you can’t scale up your operations to meet demand.

This low-friction model essentially eliminated the need for people working in functions like sales, marketing, and customer service,

Founder Brian Chesky describes this strategy succinctly: “Do everything by hand until it’s too painful, then automate it.”

As Baldwin and Clark describe in their book, Design Rules, Vol 1: The Power of Modularity,

Bits also make it easier to design around growth limiters.

Back in 1990, the futurist George Gilder demonstrated his prescience when he wrote in his book Microcosm,

excellent book Predictably Irrational, describing an experiment in which he offered research subjects

One reason marketplaces are powerful is because they often tap into two-sided network effects.