122: Chris Yeh on Blitzscaling

So Scaling up, we think about fast growing companies, companies growing at least 25, 30% per year, doubling every few years. And some of our companies grow quite a bit faster than that, having spurts or periods of growth. But today's show is actually about something quite a bit far beyond that. Today's show is about something called blitz scaling. When we grow many, many times that. And I think there's interesting lessons to learn here about what happens and some of them are pretty counterintuitive. So listen in and see what it means for you and your growth. Hello and welcome again to the Scaling Up Business Podcast. I'm your host and growth coach, Bill Gallagher. On the show with me today is Chris Yeh. Chris is co founder and general partner of Wasabi Ventures. He's also the author of Blitzscaling, which is what we're talking about today. We're here actually in one of the side rooms at the Scaling Up Summit in Denver where he just spoke to, you know, the thousand or so folks that we have. And it was a fantastic talk. So I'm glad to stop and step outside here. There are lots of great comments about it. So let's get into Blitzscaling and we're going to share some great rules for people, counterintuitive things, stage, a whole range of things about what do we even mean by blitzscaling? Before we talk into that, tell us about your background.

Right.

So who are you? How'd you get in this world?

So the story begins. I was born and grew up in Southern California and didn't know what I was going to do when I was growing up, although even from a young age I loved reading and was interested potentially in being a writer. But my dad has a PhD in electrical engineering and was a research scientist, engineer. So I also have the technology side in my family. And so I actually continued to study both science and the humanities as I was growing up. And I went to Stanford as an undergrad. One of the fun facts actually went to Stanford when I was 15 years old. Little unusual. When I was there, I studied creative writing and product design engineering. So I continued those two different threads of technology and the humanities at the same time. When I graduated, you know, I wasn't going to go into writing because I didn't want to starve. So I thought that maybe I would just do what almost everyone else did, which is to go work for ideo, great company. David Kelly, the founder, was my advisor and basically he said, hey Chris, if you want a job, let me know because we'll hire you. Which is a great thing to have in the back of your mind. But I ended up getting pulled out to Boston because I was really interested in this new thing called the Internet. And I had this opportunity to join a company called D.E. shaw Company, which still exists today. Very secretive hedge fund, but they were doing Internet startups. And I liked the idea of being out there in Boston and being in a different part of the country. I also liked the idea of being paid a lot of money, which was nice. And so I went out there and I worked on a couple of projects. Juno Online services, which eventually went public, and financial services, which we sold to Merrill Lynch. So I got the early bug of doing startups right from the beginning of the Internet. And of course, everyone at D.E. shaw also knew of Jeff Bezos, because Jeff Bezos worked at D.E. shaw before he left to start Amazon. And so we were following his story as well. And a number of the people I worked with ended up being called upon by Jeff to go out and join him at Amazon. And they did very well. So sadly, I didn't know Jeff, so I didn't receive that call. Or perhaps my store, maybe my stor would have gone a little differently.

I think I've heard Guy Kawasaki talk about maybe going to Google at one point and not taking that.

Yeah, there's a lot of stories like that. The almost. The almost. The other story I remember from an investment standpoint is that Dave McClure tried to introduce me to Drew Houston at Dropbox and I said, no, these online disk drive things never work. I'm not going to bother meeting this guy again. Maybe I meet him, I'm like, oh my God, this guy's incredible. I really want to invest in him, which is entirely possible. Or we'll get to this later on. I met my co author, Reid Hoffman when he was starting LinkedIn and I thought very highly of him and of the company. But sadly I didn't think at the time to say, oh, do you want to hire me? Or hey, can I invest money in the company? Either of which would have made me quite a bundle.

So you moved into investing now and you've started to see some things not only with your own, your own portfolio, but across the valley, right?

Absolutely.

Talk to us about what do we mean by blitzscaling? What is that?

So the way we define blitzscaling, we say that it is the pursuit of rapid growth by prioritizing speed over efficiency in an environment of uncertainty. And the reason it's so important is that.

Yeah, so that's A good thing for folks to get. Speed over growth, right?

Speed over efficiency.

Over efficiency, right?

Yes. For the sake of growth.

Yeah.

And it's really important because thanks to the dynamics of this globalized, hyperconnected market, more and more industries and markets are winner take most or winner take all, where the first to reach scale becomes the dominant player.

Yeah. And that's different than first mover, right?

That's right.

First to reach scale is a really different thing.

Exactly. And you can see that just in looking at consumer social networking, for example, because obviously Facebook was not the first mover. Probably the most well known early company was Friendster. And then of course MySpace came in, was hugely successful. But Facebook was really the first to scale to get to the point where it was the social utility that allowed everyone to connect with each other.

Yeah. And still really important. It's remarkable how although people talk about it, it's where we see more action and engagement than a lot of other platforms. Now it depends on the age and the folks that you're interacting with. Instagram's a little different depending on the age.

Yes. My daughter is on Instagram and that thing buzzes every three seconds whenever I walk past her phone because of all the group messages.

They're going, how old your daughter?

She's 14.

My daughter's 19. She's worked all over the country with leading artists as a result of connections she made through Instagram.

That's amazing.

Networking through people. Every like up and coming rapper and big names that you.

So is she in that? She's in the music.

She's a photographer, working a lot in music and fashion.

Very cool, right?

Yeah, the, the kind of networking that folks can do today is really.

And it really, what's nice about it is it sort of opened things up. I mean, the world is still very uncertain and random, but you know, in the past, in order for you to be able to make a connection like that, you had to go to the city, Hollywood, Nashville, New York, whatever. And now you can start building those relationships wherever you are.

That's amazing. Right, so tell some stories. You've shared some great stories with us in the big room. Now tell our listeners a little bit about some of these examples of Blitzscaling and what it really looks like.

Absolutely. So one of the stories that we like to tell is the story of how Google Blitzscaled and they actually did this deal with AOL to power AOL search results and to sell ads against the search results. And this was a very big deal for Google because they actually committed $150 million a year. That was the guarantee that they gave to AOL to get this business. And by the way, Google had revenues of 19 million the previous year. So it was this enormous risk that they took. But it ultimately paid off because the increased scale that AOL brought to them triggered a series of network effects and triggered a series of learning loops that allowed Google to become the dominant player in online advertising today.

And AOL is in a really different position than it was in the 90s when we first all knew it.

Exactly. I think they call it oath maybe. I don't know. It's really hard to follow.

It is. So we went through blitzscaling. You talked. I think it'd be great for you to talk a little bit about the conditions and then some of the counterintuitive things, right?

Yes. So one of the things about blitzscaling is people sometimes ask, hey, is this just get big fast? Like during the dot com bubble? And our response is no pets dot com. Exactly. Pets.com, webvan, you name it.

I still have some of the tubs.

Oh, the tubs were great. And there was a great service. Just could never make money.

Right.

So what differentiates blitzscaling is it is a systematic way to take intelligent risk as opposed to a non systematic gut based thing which just says grow as fast as you can. And the conditions that drive blitz scalability are the four growth factors and two growth limiters. So the four growth factors are the market size. You want a big market that's going to be growing in the future distribution so that you can become that first to scale gross margins so that you can pay for growth. And so that there is a reason why you're willing to take this risk because of the huge financial return and the network effects that make that growth sustainable over the long term that allow you to have that market enduring market leadership. The two growth limiters are a lack of product market fit, because if you don't have product market fit, you cannot succeed. If you do have it, you might not succeed, but if you don't have it, you definitely won't. And then operational scalability, because the ability to actually scale your people to scale your technology infrastructure is, is absolutely essential. We've seen companies like Friendster, for example, who ultimately died because of poor operational scalability.

You know, this is interesting. So my son has a startup now. He's been raised.

Congratulations.

Yeah, he's, he's like, well, I assembled the team, I raised some money, I guess I'm the CEO. I said, yeah, that's the deal. So he's gone after a big market.

Right.

Crypto that's big and potentially growing. But he also, they looked at, they said the fundamental problem is this thing never scales. Right. So let's solve the scalability.

Right. The protocol doesn't scale.

Right? Yeah. Like fast and like, oh, this might be a big thing for you.

Absolutely. And I do think that, you know, people sometimes ask about interesting sectors. I do think that the crypto sector is the one, one of the ones that is very hot right now. I think that the reason is pretty obvious. It's like, well, if you throw up financial services, which may very well be the single largest and most valuable portion of the economy, and throw it up for grabs, there's probably a lot of money to be made. But you know, I am not smart enough to say, oh, I know that these, these particular places are going to succeed.

Right.

On the other hand, there are some people who are doing picks and shovels like Coinbase and it's like, oh, those guys are probably going to be successful.

Right around the periphery of it. Yeah. He's actually addressing sort of the core technology that underlies it, the approach. Yeah. So you talked about the coupon.

Yes, the, the Groupon.

Groupon, yes, Groupon.

Thank you. Yes.

We have these moments, right.

We all do well. And you can always edit if you want. Although maybe you're like a one take.

Go straight through and let the humanity show through.

There we go.

So Groupon, we've all used our experience or been around Groupon or somebody's given us one. Right. And, and some of them are still collecting dust, a printout somewhere with a barcode on it. What's the problem with Groupon?

So the problem with Groupon is that lack of product market fit. You can go through and you can say, wow, you know, this thing should be successful and you've got the huge market, you've got the massive distribution, you've got the network effects even, and you've got gross margins because you know, again, you're giving away something for free. It's pretty amazing. And operational scalability, it's largely a bits based business and pretty scalable as well. And they're able to hire salespeople in Chicago. That was actually one of their big advantages. But they lacked product market fit, which is to say people didn't actually like using Groupon and the merchants who participated in Groupon didn't like the results. And so as a result, even though they had rocket like growth, I mean, I think Groupon at one point was the fastest growing company in history by revenues. They couldn't sustain it. And that's why they're ultimately unsustainable, because.

That experience was kind of miserable for everybody. Yeah, I guess Airbnb is a counterpoint to that.

Absolutely. And Airbnb is one of these canonical examples of a blitzscaling company. So it's got all the different factors. Obviously, it's got a huge market because you're talking about hospitality and lodging. It has got distribution, it has got strong network effects, it has got high gross margins, because again, they're not paying for the places, they're just acting as a marketplace. All these help make Airbnb successful, but the thing that also sets them apart is their founder, CEO, Brian Chesky, because he demonstrates the power of being what we call an infinite learner. When you're a blitz scalar, you need to be able to continue learning new ways to play the game, because it's changing between every stage. And if you just want to fall back on the tried and true and just do what you've done before, you're not going to be able to make it all the way to the top. So being an infinite learner is the key to being a successful blitzscaler, you know.

So this is something that I think we see a lot as coaches in the group. There's sort of two paths or three paths, maybe the big ones. The first one is the person doesn't grow as the leader and then but picks a side role, so they become head of R and D or something like that, and that's fine. They find their little home and then they do that. We maybe see a little bit of that in Google, very visible. And then the other one is they don't grow and they hold the company back. And we'll talk about Uber next, right?

Yes, indeed.

Or their growth takes them to a certain point. And then the third one is that they do actually grow and adapt and they see the growth and development of themselves as the leader that's tied to the growth of the company. Because the company, we always say, is the amplification of the leadership, Right?

That's right. And in fact, if you think about it, a good way of putting it is that the company scales at a nonlinear rate, but human beings generally only scale in a linear fashion. And so that's what makes it such a big challenge. But that's also what really sets apart people like, say, a Mark Zuckerberg, who, despite lacking experience, despite the incredible growth of the company, are able to find ways to learn and make key decisions like purchasing Instagram, for example. So I think that being able to understand how to grow yourself is nearly as important as how to grow the company if you want to stay CEO.

Right. If you're going to. So talk to us about Uber.

Right, so Uber is a great example. Again, a hugely fast growing company. A lot of strong blitz scalability factors in play. But one of the issues they ran into is that Travis, the founder and CEO, fundamentally did not want to make the transition from pirate to Navy captain. And that's one of the key, one.

Of the concepts, one of the key.

Transitions in the book. And you know, he did things like he saw his role as troubleshooter in chief. Now if you're the CEO of a 10,000 person company, you better not see your role as troubleshooter in chief. That's just insane. But that's literally exhausting. It's exhausting. And that's what he said his role was. And another thing that came out after he left is that his senior management team didn't meet as a team. He just met with the individual executives one on one. Again, that's not amplifying yourself, that's doing the opposite. Shrinking yourself and making everything reliant on you.

So we have a good example, we have a negative example, the arpv and the other one. Talk to us about the counterintuitive things, the things that are less obvious. Right, Because I think everybody loves to hear that.

Yeah, absolutely. And if you think about things that are less obvious, we'll start with one of the famous sayings of my co author, Reid Hoffman, which is launch a product that embarrasses you. And this is something that people have a lot of trouble with because, like, wait a minute, Embarrassment. Nobody likes embarrassment. Embarrassment is like one of those things that people fear most in the world. I think people said they fear, like public speaking more than anything, which I don't understand because I love public speaking. But nonetheless, launch a product that embarrasses you is not saying it's good to be embarrassed. It's saying don't let your perfection stand in the way of speed. Perfectionists will want to polish, will want to build, will want to make things perfect in their own eyes. But that's not actually making it perfect. The way you make something perfect. The way you make something good is you get it out into the market, you get real users using it and you take their feedback into account and you sand off the rough edges. And one of the great examples is actually Dropbox. So Dropbox launched Out of Y Combinator was carried in TechCrunch, TechCrunch, Disrupt, all these things. And they were signups, streaming, and they had like 100,000 people signing up the first week or something like that. And what they discovered is that only about 10% of the people who signed up actually were able to set up the app and upload a file. And it's like, whoa, it's not working. This is not working. And so they did very simple usability test. They got people off of Craigslist to come into their office, and they said, here's an email from Dropbox. Set up an account and upload a file. And they tried five of these tests. None of the five could do it. They just failed along the way. And Drew said, wow, literally, we have built the worst product ever. What are we going to do? And what they did is they went back through the recordings of those five tests, and they did more tests after that as well. But they started writing down all the things, all the problems that people encounter. And they had a spreadsheet about 80 items, and they just said, okay, let's fix item number one. Let's fix item number two, three, four, five, six, and so on and so forth. And they just kept doing that. And today, of course, everyone's like, wow, Dropbox is one of the most intuitive products ever made. Its core strength is its usability. And again, that's not where it started.

Right, right, totally. Okay, so that's, number one, counterintuitive. And it's the idea of the minimum viable product. Right. Just get anything out there and then work on it. What's number two?

So another counterintuitive rule that people are like, whoa, what's going on here? Is tolerate bad management. And what we mean by that is that in the interest of speed, sometimes you're going to break the rules of good management. The best practices, including things like, we're going to have regular performance reviews and we're going to have salary bans, and we're going to make sure that people's titles are appropriate and maybe in the process of hiring. Here's a great example of something. Uber, again, according to one of the people we talked with, one of the things that Uber did to try to grow their engineering team is when they hired a new engineer, they would ask that engineer to name their three most talented friends and got their email addresses, and then they would email them an offer, an offer letter saying, hey, we'd like you to work at Uber. Here's how much it would. Here's how much it would cost and can you start on Monday? And they did this, even though that seems kind of insane. Make offers to people that you don't even know. And it's because it's like, oh, we'll just hire these people's friends. And that's bad management, and it can lead to all sorts of problems. But if you are desperate, maybe that's something that you consider. Yeah.

And if one of your strategic limitations right now is people, and if you're scaling fast, people is a critical one. And certainly right now in this economy, people is incredibly.

People is always the limiting factor.

In the room of a thousand folks in there, it's the number one thing that they're talking about.

People think that it's money, but even in most cases, it's not. But even if you solve the money problem, you still have the people problem. Having enough great people is always a challenge.

Now we're going to look and we're going to hear tomorrow from Jeff Smart and talk about who hiring and we make careful and we learn, like hire slow and fire fast and that kind of thing. But I think the key thing, if you did something expedient like that would be to fire quickly with the people.

Absolutely. And because it is really important to continue evolving the culture of the company, that's one of the other counterintuitive rules people think culture is, oh, we set down a set of values, we carve them on a wooden block and stone tablets. And no, that's not what's happening. You're actually having to continually reinvent the culture. Because when you say, oh, this is our culture, oftentimes people are saying, well, let's hire people who are cultural fit. That's a recipe for homogeneity and disaster. And what you should be doing instead is hiring for cultural addition, thinking about what each new person can add to and improve the culture you have. So you shouldn't say, this is the perfect culture. We're just gonna keep it the same from now on. We're gonna figure out how to make it even better.

Right. Well, you can end up with a bro culture like Uberhead.

Right. Which again, then requires a lot of.

Work to do, a lot of fixing. So let's. Number three, counterintuitive.

So probably the core counterintuitive rule is let fires burn. And what we mean by that is that in a hypergrowth situation, and pretty much every startup for that matter, there are a lot of fires burning. There's a lot of things that are wrong, and you never have enough time Attention, resources to address all of them. You only have so much water, and so you can't effectively succeed if you try to fight every fire. You've got to decide which fires you're willing to let burn and which ones are going to kill you right away. And it's an art, not a science, but you have to be able to ruthlessly prioritize. It's like a triage nurse in the ER saying, hey, get this guy onto the operating table right away. He's bleeding out. This other guy maybe has cancer. Guess what? We'll deal with that later.

Right. Well, this is core to everything that we talk about. It's about prioritizing. But the notion that things that feel critical sometimes, you're going to let a few of them go so you can focus on the ones that actually matter.

Absolutely.

So those are the first three. What's the fourth big counterintuitive thing to both of you?

So a counterintuitive rule that a lot of people have trouble wrapping their head around is the notion of ignore your customers. Because again, that goes against all these classic sayings. Customers always right. Be really customer centric. And what we mean by saying ignore your customers is that sometimes you need to ignore your current customers in order to get to the point where you can serve your future customers. I'll give you an example from the early days of PayPal. Reed was one of the founding board members and then a key executive at PayPal and helped build that company up. They pivoted a bunch of times in order to actually get somewhere. They started off as encryption on smartphones and ended up being a payment system. But when they became a payment system, they started getting great traction. They were growing 2 to 5% per day, not per week, not per month, per day. And since PayPal is a payments business, when something goes wrong and there's money involved, people tend to be a little annoyed. And PayPal, like many companies, did not have a customer service telephone line. They had email customer service. They only had two people doing customer service. They were falling behind by like, a factor of 10 every day because there were so many people coming on board. And what the customers did is a small fraction of them realized that PayPal was in Palo Alto, Got their hands on a local Palo Alto phone book, found the main line, phone book, phone book, found the main line for PayPal, they don't exist anymore. Found the main line for PayPal and would dial extensions at random until they got someone. And so the net result was that pretty soon every single phone in the Company was ringing off the hook, and if you picked up the phone, there was an angry customer on the other end yelling and screaming. So the question is, what do you do about this? And this is a special case of let fires burn. So they're like, well, we could try to slow down growth. We could try to devote a lot of resources to trying to fix customer service, even though we don't have a lot of money right now. But the answer was, unplug the phones.

So you could concentrate, so you could.

Respond, so you could concentrate. Unplug the phones. Everyone use your cell phone. And the way they would use the desk phones. This is a hilarious detail. When they were interviewing people and they wanted to emphasize to them the situation, they would plug in the desk phone, let the person pick up, and listen to the angry customer. Then they'd hang up and say, oh, I don't want to do that again. So that was a case where they chose to ignore the customers, because guess what? The question was, hey, are we still growing 2 to 5% a day? All right, then that's what we need to do. We need to get to critical mass, and that way we'll be able to serve all those future customers.

So how did that turn out? We'll clean this up later. We know that it turns out right, but how?

Like, ah, therein lies another tale. So eventually, PayPal raised a large funding round, and they said, okay, now we have the resources to deal with the problem. And so what they did is they cut a deal with the city of Omaha and the state of Nebraska, said, the Internet is coming to Omaha. And they set up a customer service call center in Omaha because people actually like setting up call centers in Omaha. Midwestern accents and friendly people and so on and so forth. And the reason it happened is because one of the employees had a sister who was there. That was the only reason they knew about Omaha, because otherwise, how the hell would any Silicon Valley person think of Omaha? And so they flew a third of the company out there, and they advertised, we're hiring. They conducted the job interviews 20 at a time, because they just need to hire quickly. Group interviews, 20 at a time. And they would hire those people. And they hired 100 people the first week. Put them in a call center, have them start answering the phones. Like, actually hook up the phones and start answering them. Within a month, half of those people had quit. They couldn't take it, but half were still there. And they hired another hundred people, and they just kept that up. And Today there are 5,000 PayPal employees running a call center in Omaha, Nebraska.

So they put a brute force approach to the whole thing to deal with.

That kind of sacrificing speed, sacrificing efficiency in order to have greater speed.

Yeah. So this is the thing that is not normal scaling, right? This is blitz scaling. This is building unicorns. This is a whole other kind of world that we're talking about, right? So let's recap a couple things. So first of all, we need a big market, right? You correct me for what I didn't get wrong. We want to have great mass distribution. We want to have some access to distribution that's unique, interesting, fantastic gross margins, right? So some kind of network effect something.

Or some other kind of long term competitive advantage. One of the examples we use in the book is actually fracking shale oil and gas in Texas and Oklahoma. The source of competitive advantage there is the fact that the mineral leases run for 99 years. So each lease you sign is effectively a 99 year monopoly. And guess what? Most oil men are not worried about what's going to happen in 99 years. They're just going to get that stuff out of the ground as quickly as they can.

Environmentally minded people are just freaking out over that.

And Chesapeake Energy, Chesapeake Energy was probably the foremost of the blitzscalers who did this. A bunch of other people did this. Harold Ham did this, which is how he became a billionaire. But Chesapeake Energy, what they did is they sent an army of what they call landmen, the people who do the leases, out into the field and they said lease every. We know that this area in general has a lot of deposits. Don't bother drilling, don't bother evaluating, just lease every lot. You can pay whatever it takes to beat the competition because it's enough there.

That it's going to turn out.

And like Google, they grew very quickly. They went from like 19 million in revenues to 370 million the next year and then 3 billion the year after that.

So, and then the two things that work against right are product market fit and operational and operational scalability. So if you can't scale, you, you've got a problem there. If your product doesn't really fit or make anybody happy, you've got a problem there.

One of the points that came up today that Vern actually brought up is that Amazon is an interesting example of taking this barrier of operational scalability and turning it into an advantage where Amazon has just become so good at solving that problem that it in turn becomes one of their competitive advantages. They now provide the infrastructure for other People through Amazon Web Services, through Amazon Logistics, through Amazon Store and so on.

And so on, built all these things and they can go at it. And then you talked about some of the counterintuitive things. So launch an embarrassing product, right? Go with something even when you don't feel great about it yet, to get it out there so that you can learn and improve from it later. Tolerate some bad management, make some mistakes, do some novel things along the way, let fires burn. So things that feel like critical to you, let them be. And focus on a couple of of things, one or two, and then the last one that's so huge that kind of dovetails with that, right. Is ignore customers sometimes, Sometimes if you're growing, the ultimate proof is in that. And then deal with that in some other way later. And maybe going back to the bad management, which you talked about, the mass.

Hirings and things like that, all these things, you incur organizational debt, you incur business model debt. It does come due at some point. But the point is achieve that critical scale first and then go back and fix it.

So the book is Blitzscaling. We'll throw a graphic up, we'll put the notes and a link right into the show. Notes for this Chris Yeh with Reid Hoffman and you can get more or hear more about it. Go read@blitzscaling.com in addition to the book.

Yep, that's right. And for classes and other things that are not necessarily book related, we've created another website called globe globalscalingacademy.com and you can go there for information if you want to have me come to your town or you want to see if there's classes that are available to learn more about these ideas.

Awesome. So we do two summits a year. We bring great speakers like this and we do a podcast like this every week where we have one of the experts or a CEO or one of the other coaches, one of the gurus of scaling up, the world of scaling up. So come back and see us here every week. Also, if you want want our free tools, a copy of the scaling up book or any of that, just go to scalingcoach.com and you'll find us there. Thanks again. We'll see you next week.

Thank you so much, Bill. Such a pleasure.

Once again, special thanks to original growth guru Vern Harnish. This show is produced by NY Obed. Audio production is done by Podfly Productions with audio editing by Albert Burge and the show notes are compiled by Ein Kodina and proofread by Tim McGowan. If you got some value out of our show today, please share it with somebody else so they too can get the value and let us know the parts that you most loved. Thanks again for listening and keep scaling up. Sa.