Blitzscaling | Competitive Strategy with Reid Hoffman & Chris Yeh | Greymatter

Hi everyone. I'm Reid Hoffman, a partner at Greylock Partners and host of another scale essential podcast, Masters of Scale. Welcome to our new podcast from the book that Chris Yeh and I published, Blitzscaling. Chris and I have been fielding a number of great questions from entrepreneurs and others on Blitzscaling. So we decided to launch a podcast dedicated to Blitzscaling in partnership with Greylock's Gray Matter podcast. Today, Chris Yeh and I are sharing strategic advice and insight for entrepreneurs looking to blitzscale their companies specifically around competitive strategy dealing with major threats and globalization. So let's get started.

Hi folks, this is Chris Yeh, the co author of Blitzscaling and the co author of the alliance and and in today's episode, we're going to be focused on the question of strategy as it relates to your competition. In other words, competitive strategy. And as always, I am joined by my old friend and co author, Reid Hoffman.

Awesome to be here with you.

Now, Reid, when it comes to competitive strategy, there are these two different schools of thought. One school of thought says, you know, having competition is good, it helps you validate your market. And the other that says, competition is for losers. So is it better to have competition or to not have competitors?

Generally speaking, I personally think it's better not to have competitors, but there's advantages and disadvantages on both, and you just have to understand where you are. The challenge if you don't have competitors is that you can have a lack of focus because you have a free field and you can kind of say, okay, I can build what I want, I have the time for it. I can be more efficient, I can go under the radar. I may not have to worry about competition. They may not have to blitzscale. All of those things mean that, well, maybe you'll drift, maybe you won't be as sharp, maybe you won't be as focused. Also, frequently, you don't really know if you have a market, right? Because if it's known that there's a market there, you will have competitors. People will be coming. Maybe they don't realize your particular product solution works, but as soon as they see it, it's a known market. And so the challenge is, if you have an unknown market, what does that mean? Like, should people give you money? Is there actual, real product there? Are people actually going to buy it? Those are the challenges. On the not competitive side, the benefit, of course, is if you have discipline, you're really focused on it. You're doing the kind of lean startup like testing against where is my product Market fit. How do I make that happen? How do I essentially drive to that then? Actually, in fact, it's a much easier race to run. And you don't have other variables that could cause you to fail that are outside of your control. You have much more control of it. So I prefer the no competitors. Now, if you do have competitors, then they help focus you. It's the other side of it. It's the we have to get there quickly. We have to do better. We also, of course, have at least some visibility into the market. This is what customers buy. This is what customers want. This is how the field talks about it. And so you can get all of that as useful elements of your business when you have competitors. Now, of course, the problem is maybe your competitors will win. Maybe your competitors will pollute the field and no one will win. As you compete for financing, as you compete for customers, as you complete for employees and talent, each of those things will be slowed down by the impedance factor of competitors. And this is, of course, both by one of the masters of scale episodes we have, which is break free of the competition. That's the one with Peter Thiel and of course, why we wrote Blitzscaling, because the first to scale, the first that breaks free of the competition goes to scale, is essentially key for how do you succeed?

Now, Reid, that's really interesting because one of your first entrepreneurial experiences was as you were working with the team at PayPal, and when you launched, you launched into a market that already had some competitors that were then coming into focus as well. How did you think about competitive strategy as you were launching PayPal?

So PayPal is one of the places where I really learned and took to heart the absolute importance of speed. The importance of speed about being the first to scale. Because on one hand, one of the huge challenges at PayPal is that eBay, the place where we acquired all of our relevant customers or all the relevant business, was for years, had already bought a credit card acceptance service called BillPoint and was deploying it. And so we were competing with them on their own platform for what they viewed to be simply a feature of the platform. For example, credit card payment acceptance, where we were trying to win there. Now, we had some modestly different angles, but it still was, you can pay me for the good on ebay with a credit card. That was deeply competitive. The second part was we were having competition from startups because another startup called X.com founded by Elon Musk, which had the idea of being an online bank, quickly realized that the way that we were acquiring customers through the payment side of it, which is frequent transactional spreads to new people would be the right way to try to acquire new banking customers. So they started fast following us with a kind of let's do everything they do and let's do it more. So PayPal was saying, hey, if you invite someone in to become PayPal with you because it's a payment service, they get $10, you get $10, you get to experience the transactional dollars for free just by connecting and using that invitation into the service. So X.com said, okay, we're going to do $20 and $20. So we had these two massive competitors. A competitor that had the home field advantage in the field that mattered, and a startup competitor that was trying to overspend us on capital in terms of how to make it work. And so we learned the importance of focus, the importance of speed, the importance of getting our way through. And ultimately we realized in discussions with Elon that actually, in fact, putting the companies together so paypal and x.com merged would be the best way of dealing with competition on that side, even though we were ahead and we were acquiring customers, they had a bunch of useful things like banking licenses, and we'd be better off combining together in order to achieve PayPal. And on the bill point and ebay side, what we realized was the important thing was to out speed them, was get deployed, to market, have a bunch of the key bestsellers love us much more than they loved billpoint. And a lot of that was, for example, the speed at which you could register and start using it. Billpoint had been built on the old banking business model, which is, well, you're going to register and we're going to spend weeks validating you, and after we validated you, we'll allow you to accept some credit card payments and so forth. And people were like, well, no, I just want to start using it right now. And so we did that and figured out how to make the fraud models and all the rest work. And there were a bunch of other things that, that dealt with beating billpoint on speed, but a classic one was we were all in and committed to making it work. We knew this was live for death for us, and we knew what were the key elements of the game to work, what were the strategies that needed to make that happen, which combinations of tactics would play into that. And so therefore, we massively outpaced Billpoint on eBay's own platform.

Incredible. Now, how do we generalize from that experience and help entrepreneurs think about the competition they face when they're designing their business model. What are some of the ways that they should tweak what they're doing in order to maximize their chances of success?

Well, one of the things that people frequently don't realize is that there's strong differences between business models. Like, some are much stronger, some are much weaker. And there's a set of attributes around those business models now. People noticeably go, oh, the attribute is the one that's better is the one with higher margin. And of course it's better to have higher margin. You make more profits, you can invest them in the stuff you're doing. You'll be valued more highly in terms of your equity. In terms of investors. That will also compound into acquisitions, talent, hiring, and a bunch of other things. But actually, in fact, usually in startups, your margin's more theoretical. So, like, well, we think we can get to this margin. We don't know because we're deeply in the red right now. And what is the natural margin of this business is one of the things we figure out as investors, as entrepreneurs. But one of the really key thing about the difference of business model at how fast they allow you to grow, how fast they allow you to acquire customers, how tunable is it, for example, can you improve it over time, and can you make the improvement work? And this is one of the reasons why the Internet is highly known for two business models, both of which get them into some controversy, although one more than the other, the one that generates controversy is advertising. Why is advertising such a strong business model? Well, the reason is what's the price that customers really want for their products free? It's like, just let me use it for free. Let me use search for free. Let me use communications for free. Let me use social networking for free. Free is a great price. As a matter of fact, even sometimes people essentially organize it so it's even cheaper than free. There's things that you get that are better than free for using this product. And of course, you need an economic model for that. So that economic model tends to be advertising. And one of the things that's not present in the discussion and debate so far saying, oh, we should be limiting data and so forth, actually, in fact, when you take a global scope and you look at, well, which global businesses are going to win or not, is the ones with stronger business models. So the ones that can work on their advertising business, the one that can perfect their advertising business model to be actually, in fact, better and stronger, will be stronger globally and will bring more economics and profits back to the countries that they're housed in. And so the challenges of the advertising business model, I think have not really thought it through. It's not to say there aren't things to do and improve, but even when you get to a consumer value proposition, you say, well, I go to you as a consumer and I say, would you rather have an ad that might interest you or would you rather have a random ad? Well, if I'm going to have an ad, I'd rather have one that might interest me, please. That's kind of advertising, which is one. And it's a reason why on the Internet it's been a super strong business model. The second is freemium, which is free but converts to to paid. It could be convert through a trial usage, it could be convert through amount used, can be converted from the amount of time you're on it. But it has the similar kind of attribute that is very positive for advertising, but then can convert into a user pay model. That kind of thing can allow for individual payments, can allow for enterprise payments. You see this in a lot of products, you see this in LinkedIn, you see this in Slack. And there's a number of places where you go, okay, we start as a free product, but we upgrade to premium. And we do that in ways that align our interests and our users interests, both at the free side and on the premium side. And so that freemium business model has been another big invention on the Internet. And part of the reason why the Internet allowed it and enabled it was because before, before network connectivity, getting a new product was just too expensive. So here, have it for free and then upgrade it. Too challenging. Whereas on the Internet, much easier to do provision through the cloud. Provision where you could say, okay, well now you've used it enough and now you need to pay for it, is a reasonable thing where you both give out the free and also have an ability to say, oh, now you need to pay me.

So as you develop your business model, now you're going to market, now you're competing with a number of competitors because nobody exists in a market without competitors forever. How do you define and establish a competitive edge?

One of the key things to think about competition is that it's both an offense and a defense game. The offense game is how you win the particular game, how you acquire customers, grow faster, acquire the better customers, better talent, better capital, more amounts of capital. You know, how you essentially win the game on offense. It is also a defense game. How do you hold on to the customers you have? How do you hold on to your brand, your market position. How do you essentially stave off various forms of competitive attacks? And competitive edge is important for both. And sometimes it's the same edge that's important for us. Sometimes it's different. Now, you can do it across all kinds of things, but the key ones that people don't tend to think about are things like go to market, or what is the switching cost once I have the product? Or this is closer to how they think about it, is what is the cost of the product or service relative to the need? Like, which has a better product market fit? And then you begin to get really interesting. It's like, well, do we have a competitive edge in talent? Can we have better talent or cheaper talent? Can we provide it if we have a higher margin business or more capital, can we invest that capital in ways as part of what we're covering in blitzscaling, we. Which we call blitz capital. All of these things are ways that you can have a competitive edge. So you need to figure out which game you're playing and then have an edge within that game.

Right? And it's like a game in the sense that it's not like there's a single rating that says that you're better than your competitors. It's a question of what axes of competition do you have an advantage on? What are some of the ways you can test your hypotheses about what makes up your competitive edge? How do you find out whether you're right or not?

So it depends a little bit on where you're competing, what the strategy is. Is it in talent? Is it in customers, Is it in capital, et cetera? Frequently you just, you know, like, did you succeed in the field? Is one of the ways you learn it. Now, two ones that involve customers that I think are really important is one is to go ask customers and ask them what I sometimes think of as the directed question, which is, why wouldn't you? Or, what's wrong with my product? Or if I had this, would you buy today? What price would you buy it at? Why wouldn't you pay a higher price? Because then you get the directed answer. If you go to ask someone, do you like my product? They'll say, well, I'd rather stay friendly with you. Sure, I like your product. Doesn't help you ask the directed question. The second thing is to test with advertising. One of the things that the Internet allows you to do, and a lot of entrepreneurs in modern skilled ways do this, is they'll just buy some advertising on Facebook or LinkedIn or Google or YouTube and they'll buy some advertising and they'll see what the response looks like. And they can even do this before they have a product or service. They'll say, hey, would you like this following product or service? And then people click through and they might sign up and say, oh great, we're developing and we'll get back to you when it's ready. And that will give you a sense of product market fit, give you a sense of demand. And so you could say, well, if it's a product market fit, competitive edge, does this do it? Now, of course, it ranges across a wide range of things. What's your go to market strategy? What's your financing strategy? What's your talent strategy? What is your first version of your product? What's your second version? What does version 1.1 look like? What does 2.0 look like? All of these things have different ways of trying to say, test your competitive edge. Let me perhaps close with the last one because this is quick and important, which is go to the smartest people you know, they have some experience in your product service area. That's great. And again, ask them the directed question, do you think I have a good enough competitive edge? My theory, my belief is my competitive edge is X. Does it seem that way to you? Or specifically, do you think it's not that way? Try to give them as much clearance as possible to say, you know, you think there's a big difference between your go to market strategy and this go to market strategy, and then you can say, okay, why is that and how do you do it? And then get to the clarity of what your theory of your competitive edge is.

And this is definitely one of the core Reid Hoffman strategies, which is leverage the network, leverage the smart people that you know to help you make better decisions. Now, when we think about the competition, then I guess I'll just ask this core question. What kind of competitors should you avoid and what kind of competitors should you seek out?

So in avoiding competitors, the obvious one is to avoid strong ones or motivated and committed ones. Strong is they have assets, they're highly capable team, they have good market position, they're well backed, they're motivated and committed. This is the battle they want to win. It's in their short list. They're committed to it, they're not likely to be dissuaded by it. They want to play. Those competitors are very dangerous. One of the things that tends to be less obvious is people tend to think, well, if I'm competing with these Great massive companies like Microsoft or Google or Amazon or Facebook or Apple, they go, oh, don't compete with those. Well, it depends. They are super strong companies and the things they're doing and it's very difficult to compete with them in. So you want to compete with Google and Search. Well, you better be Microsoft with Bing. You want to compete with Amazon aws, well, you better be Microsoft with Azure. Those things are super hard. I'm going to create a new cloud like, oh gosh, the three giants are really going after this already and they have a lot of resources and it's a large player game. Most often for startups, the real interesting issue is other startup competitors because you say, well, does Google have a product that competes with the thing I do? Yeah, it's a team that's based out of remote office location X. The team really likes it, but they're not really getting backing from the company and doing it. You're all in, you're motivated, committed, you have a unique approach to it. You possibly can get allies because those people would like to compete with Google. Da da da. Well, generally speaking as a startup it's much less often is the issue competing with a bigger company, even very strong big companies. But it's more competing with other startups because you're carving up the talent that would want to go to a startup doing it. The go to market strategy, the finances that would do it. You're competing for all of those same pools. And so the less obvious thing is that startup competition tends to be more of the ferocious problem than large companies, even great large companies when you're a startup. Now let's get to the last two points on this. So the one point is the most dangerous competition is blitzscaling competitors because blitzscaling is we're doing a bunch of capital, we're going for broke, we're trying to own this market, we're trying to get to first to scale, we're hiring lots of people, we're learning and accelerating a fast rate of what our product market fit is. We may have identified our product market fit already and it's very hard to compete with blitzscaling companies that are significantly ahead of you if they're in the same place. If you can do it, great, then you're both blitzscaling together and it'll be an epic dog fight. If they're blitzscaling but going in the wrong direction or you think that they're going to run out of steam and you can pick up afterwards, that can work too. But blitzscaling Is that motivated, committed, well resourced, going for its startup team. And usually if they got into a place of blitzscaling, they got some product market fit, they have a pretty good team and so forth. So they're actually in fact the most dangerous competitors of all, not just other startups. And that's sometimes why a startup will choose the blitzcale even before it has competition to get out way ahead before the competitors come in and potentially blitzscale. The last point is that which kind of competitors do you want, Will? Your ideal competitors are ones that are really locked into their business model, that are kind of traditional, that that's their business model. It's very hard for them to change. They want to keep doing the thing they're doing. They're locked in because each of their product managers tune their current product changing runs into Clay Christensen's innovators dilemma, which is it's a different way of organizing and I would have to have them change their supply line or the product or the way they operate. And it's very difficult to do organizationally that the organization doesn't really have the will to do that. They kind of think, hey, if it all works on my watch, it'll be fine, I'll hand it over the next one. Those are great competitors to have. And part of the reason why it's great is because there's already a known market, there's people buying and selling, and you're trying to occupy that market. And so if you have a competitor that's essentially locked in to their particular thing, where your thing gives you a unique edge and you just need to get it going fast enough, get it big enough, that's a really good competitor to have. And frequently that's one of the cases where you will blitzscale into it, thinking that's the competitor that I'm taking on because I have a new product and for example, workday, the cloud is what you're moving to. And so let's blitzscale to the cloud in order to make that happen. And of course you can hear about that on the Masters of Scale episode where we interview Anil Busri for workday.

One final question before we end. So we've talked a lot about what happens during the early stages of scaling and blitzscaling as you're thinking about your competitors. How do the sources of your competitive advantage change as you grow? Because as you know, a blitzscaling company grows from a family to a tribe, to a village, to a city, to a nation, and there are a lot of changes that happen along the way. How do those changes affect competitive strategy?

There's obviously more answers to this question than we have time for. It's a good and broad question. But roughly speaking, here's some of the simple points to note. So one is a really key competitive advantage usually is speed. You usually have the most raw speed, the most raw flexibility. When you're small, that gets harder to do once you're larger. It's one of the reasons why you want to be broadly on track. When you're blitzscaling, you want to say, okay, you know, we may be changing our business model, but not a lot. We may be tuning our unit economics. We charge for this, we don't charge for that. You know, these are the components that go together. And that's really important because as you get to scale, those are harder to change. Change across a large organization may require massive changes in the organization. And so you may still have speed, but it's now just raw velocity and direction versus dog fighting and flexibility. You also have an ability to take certain kinds of risks. So when you're small, the metaphor that I use for this is you throw yourself off a cliff, assemble an airplane on the way down. You're already dead when you're in a startup. So taking risks that may lead you to being dead. Well, you already are dead, so try it anyway. Once you begin to establish a business, this is part of what gets you in the innovator's dilemma. You have customers, you have revenue, you have responsibility to your customers, responsibility investors. And you're making that go. And then throwing that away to do something else is much more difficult, much more challenging. Especially when it has persistent value. It isn't just like we know it's going to be dead in a year. That's a little easier. Still can be difficult to persuade everyone. But how do you make those kinds of changes? Well, you can do those as smaller and much harder as larger. And then finally I'd say is because I've been talking about the advantage. You have smaller when you're larger, you have more resources. You can multi thread, you can tackle it, you can overwhelm by size of capital, like we're simply subsidizing our way in the market. You could see Uber doing that for a number of years, going, we're going to raise a ton of capital and we're going to subsidize, jumping into many, many cities and we're going to compete on the basis of trying to get all the capital absorbed into us in order to make that happen. And that's an example where when you're larger, an ability to both deploy capital and raise capital, that can be a substantial weapon that becomes new and available to you and maybe even a primary weapon as you grow.

So in today's session, we've talked a lot about competitive strategy. We've heard that the ideal situation is to not have competitors. That's typically not going to be the case. And so you are going to try to design business models that are going to be stronger than the competition. You are going to make sure that you intentionally define and hone that competitive edge and that you test those assumptions that you're making. I think we heard a lot of great stuff from Reid about what kinds of competitors you should avoid and seek out. Now, competitors are not the only threats to your startup, and in next session we're going to talk about some of those major threats you need to foresee, address, and ultimately deal with in order to achieve success.

Thanks for listening. This is Reid Hoffman, partner at Greylock Partners and host of the podcast Masters of Scale and co host of this podcast. To get this podcast every week, subscribe to the Gray Matter Podcast on itunes or wherever you prefer to listen to podcasts. If you have any feedback on any topics we discuss today, including competitive strategy, major threats and globalization, or any questions you'd like to ask in the future, Tweet us at GreylockVC or at Reed Hoffman with hashtag Ask Reed. Or, of course, post on LinkedIn. Chris, Shay and I go through the questions to select the questions we answer on this podcast. Have a great rest of the week.