Blitzscaling Strategy: Major Threats with Reid Hoffman & Chris Yeh | Greymatter

Foreign. Hi, everyone. I'm Reid Hoffman, a partner at Greylock and host of another scale essential podcast, Masters of Scale. Welcome to our new Blitzscaling series, a part of the Gray Matter podcast, elaborating on the book that Chris Ye 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 answer some of them here on Greylock's Gray Matter podcast. Today we will focus on major threats. So let's get started.

So when it comes to the question of strategy, one of the major areas of strategy is understanding the major threats that face your startup and how best to respond to them. And so, Reid, what I'd love you to do is to help people think about what are the key threats that founders and executives should worry about when they're blitzscaling? How do these threats change as their company grows? And how do they vary by industry or geography?

So the central threat that Blitzscaling addresses is the threat that another competitor gets the scale before you. As we say in the book, these are Glengarry, Glen Ross markets, first prize, Cadillac, second, second prize, steak knives, third prize, you're fired. That may be even overstating it. And so the usual threat that you're dealing with is, okay, are we going to get there before a competitor? We need to get to scale faster, we need to hire, we need to go to market faster, we need to raise more capital, we need to deploy our product faster. Those are all of the combination of set of things that lead to boot scaling. Now, that being said, there's a lot of ways that you can fall off the train or get into a train wreck. So there's a number of threats within that. So one is accurately identifying the potential or actual competition and speed to kind of figure out how fast you need to be going. Because each speed that you ratchet up, you will increase your error rate. You'll, you'll increase your error rate in hiring, you'll increase your error rate and go to market, you'll increase your error rate and all kinds of different kinds of friction, including maybe even shoddier product in various ways. And so one is, where does that actually need to be? And of course, you default to a little faster than trying to play it too safe, because the speed to scale is what matters. The next thing you need to do is to make sure that you have a company culture, as we detail in the book, that has the right resiliency for the flexibility and dog fighting and the shifting of org structure and the ability to have a collaborative, healthy. We are working together. We aren't doing things that are toxic. We are making this change the world together. And that sort of company culture is one of the things that if you get wrong, you just may never be able to go back and get right. Like a lot of what we cover in blitzscaling is here are fires you can let burn, here are things that you can be mistaken about because you can correct and you should iterate through quickly and correct them. But things you can do but like your company culture is another one. The third and most tricky one is we broadly recommend in the book in what we say that, that you should get product market fit before you scale. But sometimes it isn't just product market fit, but scale product market fit. Like you may have a product market fit that works just fine, but it isn't the actual thing that gets you to scale, isn't the right thing. That actually in fact is the scale ecosystem. And so you're going to be iterating on defining what that product market fit as you go. And of course, getting that wrong can be horrifically expensive and frankly fatal.

Now, one of the interesting things that comes out of what you just said, Reid, is that many of these threats are not just external threats and competitors, as we talked about in competitive strategy, but internal threats, things that if you don't get them right at the beginning, can later grow and take down the company.

Exactly. And so part of the question to sort through is which things do you absolutely have to invest in getting right as you go along and. And which things are correctable. And so product market fit is one of those ones where you'd really like to have it, even the scale product market fit early because unwinding, that is unwinding a whole bunch of different things that could be critically catastrophic your company. That's part of the reason why folks like Sam Altman on Masters of Scale as part of YC said, well, what really matters is not that 1,000 people like your product, but 100 people love it. Cause that love is the product market fit that you're trying to scale. And by the way, that is a good piece of advice. It isn't actually in fact 100% rule, but it's a good piece of advice. And that's one of the reasons was one of our episodes on Masters of Scale. And so that's one of the ones where you go, it's as important as possible to have the product market fit and the scale product market fit early. And so Iterating changing, looking at it, super important, but it's an example of something that you can modify and alter as you go along. Company culture is another one of those where if it's broken from the beginning, resetting it may not be possible and that may just drive you off the tracks. A culture about how you deal with your ecosystem. Governments, regulators, competitors, employees. In the case of Uber, this is a leading thing. Drivers, those things may be actually in fact very, very difficult to reset. Now in the Uber case, fortunately, because they had a massively good product and a massively successful ecosystem, they were able to reset it. But it's been very painful.

Now let's think about some of those external threats, because again, there's competition, there's the environment you exist in. How do the threats that are posed by the established companies in the ecosystem differ from those posed by emerging startups? Because I know you have a take on which one is really more threatening, right?

So what People mostly, as you know, tend to think it's what does the Google do, what does the Microsoft do, what does the Apple do, what does the Amazon do, what does the Facebook do? Those are the real threats. And in those very specific rare circumstances where you are going up against their main product line search, a new phone, os, social network, enterprise and general productivity, you have to pay attention to them. But these companies, they're goliaths, they do lots of things, they're operating in a wide variety of fronts and while they may even have a group working on your product, they're not actually in fact usually the key thing by which your product lives or dies, or if it is, then you probably have chosen the wrong startup idea. So for example, you shouldn't try to go do a desktop search or a mobile search just on the mobile device because well in fact actually that's a province now of giants. Now if you have a unique idea that's disruptive, that's part of why innovators dilemma is different. Or disruptive in product or disruptive in go to market strategy or some way that pulls that all together, then that then makes you fairly distinct from how the giants are. It's still an outside a low probability chance you could become one of their top three to seven foci because that's the only thing that really matters in the startup competition. And then okay, that's difficult. But your real competition is startups, because your startups are really the people who are competing for you across the board on all of the things that your startup is trying to do. Capital, they're competing with you for the same sources of capital talent, they're competing with you for the same sort of startup talent pr, which is the normal early launch, the first go to market. For all startups they're competing with unpr, go to market, strategy, scale, go to market, whether it's, you know, in consumer, Internet, virality or SEO or channels or anything else, they're competing with you on that too. So across everything that matters, they're there competing. And if you have multiple in the same pot, it just tends to all get divided. That's the reason why blitzscaling, that's the reason why pulling ahead, compounding at growth, being at a different level of order of magnitude, a different order of magnitude of velocity, a different order of magnitude of scale and continuing to compound is what's really key there. And so the advice I tend to give startups is do not just go, oh, we're going to be one of the X startups and we're all trying to compete out of it. That's very, very dangerous. Try to be in a place where you are really by yourself. Now, the by yourself comes with different risks because, well, by yourself usually means, well, you may have a unique idea, but it may or may not work, May not be product market fit, may or may not actually have demand, but if it does, then it will work very well. Consider for example, the plethora of dating apps. So just launching one more, I've got a profile, it's dating app. My idea is Hindu singles versus anyone else. You might work something out, might be valuable, maybe the ones really servicing that particular niche to make it work, but you're ultimately highly slowed down in getting to scale. Now, that being said, part of the reason why I pulled out dating is if you go and invent something truly interesting and distinct, a different pattern of social interaction like Bumblebee, a different action of human interface that you can own for a while, like Tinder, that can potentially bring a whole new market and you can potentially be the service for that new market. And that can work, it's just a different level of risk.

Now, you've been a very successful entrepreneur, you've invested in a number of very successful entrepreneurs. So you've seen these stories play out quite a number of times. What are some examples of people who have successfully responded to some of these major threats that you've described? Some of the specific companies and entrepreneurs who've done this.

So I'll give two examples. One, PayPal in my own background, and then two, Uber, partially because it's time relevant now, and also partially because this is amongst the credit category for the first generation, Travis and others for being super smart and super good entrepreneurs navigating these challenges. So in PayPal, we initially launched with something unique and distinct. It was payments on Palm Pilots synced with email. All of that was irrelevant. We threw it away. It became an email payments platform and we were moderately unique in email payments. There were a bunch of different things, but became the battlefield was entirely on ebay. And ebay had already purchased a company called billpoint and was running it to be the payment system within ebay. Now, this is one of those classic things of where on one hand, super difficult because the field for the market was owned by our competitor ebay, but on the other hand, kind of a classic startup, David versus Goliath in a set of the decisions, because billpoint more or less presumed because it had the platform, that it would eventually win and that it didn't need to move fast. It didn't need to really figure out why PayPal was working when it wasn't and what it needed to do. It was certain that it had the right model of the world and so we could be faster in innovating our credit and acceptance. We could realize that the vast majority of the payments actually happened on email, not through the website. Frequently the PayPal you won the auction notice would get to you from PayPal before it'd get to you from ebay, because that speed really mattered and people would pay with the thing that got to them in terms of doing it, in terms of making the payment for the good. And so PayPal went, okay. We realized the entire market's on ebay. We realized that we have this to the death competition. But because we have that startup focus about getting to scale and getting the PayPal network to scale first, we can make it work. And we were all in on that. And that's an example of recognizing where the market is, product market fit evolving as you're going where the scale market is, and then essentially winning that scale market against an entrenched competitor who owned the ground that the transactions were happening on. The second is Uber. So Uber started as wouldn't it be nice to have a app to essentially make the front end for calling black cars, for deploying black cars, for being hailed as a black car driver, not just through the phone, but to make it much more liquid, much more available? And that was amazing and delightful app. So along comes Lyft, and Lyft says, okay, you're doing black cars. We're going to do the anybody thing. And Lyft had some kind of funky ideas around, well, maybe it would be free, but you could tip and other kinds of things. But the real insight was actually, in fact, we're going to enable an entire new set of supply, which is not the black cars, but kind of just about anyone who could pick you up on the street and make that work. This probably would have been a catastrophic threat to Uber because a huge amount of their volume goes through what is now called UberX. If Travis wasn't so competitively intelligent and said, and whatever the set of people around him and said, oh my God, we have to launch this too. So we're both going to have uper black car and Uber luxury, right? So we're both have the black cars and the sedans and the luxury cars. We'll have all of that. And by the way, all of those drivers are going to hate us for doing this. We're also going to make UberX also available and we're going to price UberX to be very competitive with what's going on Lyft to make sure that this acquisition of this market also accrues to us. And so that's part of the reason why you have both Uber and Lyft today. And Lyft continues to go. Uber didn't get eaten by the much broader, much cheaper set of drivers where a lot of people who are using Uber are actually using UberX today. They had to weather a bunch of blowback from their drivers from a variety of other sources in terms of doing that, saying, no, no, wait, you, we made you, we adopted you first and now you're doing this other thing which undercuts our fees and so forth. And they had to navigate that. But it was the right thing for being the dominant transportation, the people transport service. And that was a key thing that they did in order to navigate who is the first prize winner and in this case who gets the Cadillac.

And it really seems to me, as I pull on the thread that connects that PayPal and Billpoint story with the Uber and Lyft story, is it really is that sense of urgency. Billpoint lacked the sense of urgency. They thought that by default they were going to win. Obviously they were wrong, but because of that, they didn't act with any sort of urgency. In contrast, Uber, already much bigger than Lyft, already much more money raised than Lyft, didn't hesitate to turn the entire battleship to cannibalize the existing business in order to respond to the competitive threat. And as a result was able to achieve the market leadership.

Exactly. And it's recognition of competitive threat, recognition of the necessary velocity, implementation of that velocity to be the first to scale blitzscaling.

In a word.

Exactly.

Now, are there any cautionary tales, I guess you could look at the other side of those stories of companies that ignored or failed to address the major threats, great franchises that were brought down by a lack of urgency, lack of.

Recognition of the threat, lack of recognition of change and lack of urgency are probably the reason why that over the last few decades the topple rate, which is the companies falling out of The S&P 500 is double what it used to be and is increasing. And so the question that tends to, to happen in these things is do you recognize this disruptive force coming? Do you recognize that mobile consumer Internet, you know, web browsers, online forces and do you recognize that this is a essentially a threat to you? And then the new company gets established. There's a whole swath on of course the vast majority of the journalist newspapers because they went, no, no, we're just in this newspaper business, we don't need to be doing online. Yes, we need to be online. But online is simply taking what we're currently doing and just parking stories online and not navigating that the right way. I mean you see a very belated set of recognition of saying okay, now what's becoming more norm and standard is you get X articles for free and after that you have to pay. But you could have started that kind of thing earlier. You could have also figured out how to have ways where you say, well here's all the stuff we do that's essentially free and here's all the things that we do as kind of lead generation to pay in order to make that happen. So that's one of. But there's just tons of industries that are either technology companies or non technology companies that are turned over by the new technology, frequently new software that's running.

And one of the things you often say is that in the future all companies are going to be technology companies. And in many ways I think you can almost extend it further and say all companies need to start thinking like startups in the sense that they need to understand that by default every business will eventually come to an end and instead of thinking themselves as by default we're going to win and let's just proceed majestically on our way thinking by default someone's going to take our lunch, how do we make sure we're the ones who take the lunch?

Yep. So the key thing is Recognize technology changes. So recognize whatever product or service you have today underpinned by technology the way that it is, that will change. So it is not this product forever, full stop. Now you may have decades with it. You may actually have, as you're looking at it, say, no, no, actually, in fact, that's not a threat. And by the way, recognizing that things aren't a threat, that's the billion or trillion dollar question to figure that out. But, but saying, okay, not that, not that, not that, okay, this one. And that's super important because you could imagine like for example, all the Hollywood studios saying, oh my gosh, we should stop making movies. We should only do 3D VR is here. No one's gonna go to anything other than a VR movie and we're gonna stop and so forth. And that would be a disaster for any studio that had done that thus far. There might be some point where the ability to make that VR is the key differentiator by which suddenly one studio or either becomes dominant or a new effort becomes the new dominant studio. And then those are also less. That recognition of that change is really key. And then once you recognize the change, you need to figure out, well, how am I playing? Am I experimenting? In which case I'm trying to evaluate, do I have to go play hard and fast? Do I believe it's a slow growth market, so I'm slowly growing with it, or am I going all in and playing hard? Because one of the key things is it's usually not a strategy that you're really committed to if it doesn't hurt if you're wrong. So you have to really kind of commit to it. Another one, as I think through your question, is classically Blockbuster and Netflix. Shelley Archambault, another person on masters of scale, brought Netflix to Blockbuster saying, hey, we should buy this and like, oh, we have no interest. And now Blockbuster basically doesn't exist anymore.

My understanding is there is a single blockbuster outlet, one place in the world which still exists, although it's no longer affiliated with the Blockbuster corporate entity.

Huh. Entertaining.

I think it might be in Alaska. So one final question on the topic of threats. One of the threats that's very much on people's minds right now is the threat of government regulation and antitrust. How should entrepreneurs and executives be thinking about this and responding?

So there's early, mid and late stage within your blitzscaling journey. In the early part of it, you actually are thankful that if governments are interested because it may winnow out the number of competitors in the field of Competitors, it's possible that you can go and set some of the groundwork before you actually start having to bear the cost of what anything from talking to the regulators to following the regulation is. And you want to go do as much of that as possible. Now that gets you to your mid stage. The smart thing to do, like what we did at PayPal is to engage the regulators and say, look, we're talking to you, we're explaining what we're doing, we're explaining why it is that we think our thing is good for the world, good for consumers, good for industry, why it's a net trade up. And so even though there's a bunch of banks that are telling you that, that we're engaged in illegal banking and that we're going to disrupt the financial service, this is why it's actually in fact giving us the rope to go establish our ecosystem as good for you. And by the way, we're talking to you, we're being transparent, we're being clear about what we're doing, we're figuring out which things really matter. Like for example, we figured out how to get FDIC approved insurance on the deposits and that was protection to consumers. And how does that work? And then when you get to scale, you then need to participate in what is the right regulation. And if at all appropriate, hopefully you're not going to just try to lock the door against other startup competitors, but actually give the real here's what it should be. Because the normal part of this is to do regulatory capture, which is to say, great, let's regulate search engines, let's make it so that no other company can start a search engine unless they're a massive company. No startup can do it. And so you need to kind of work through that area too. But generally speaking, being in a regulatory space is potentially good news for winning one competition. Now there are some exceptions which we cover in the book under responsible Blitzscaling chapter, which is there's areas where you say, well actually in fact if you're doing something like blood tests or doing something else that has great individual impact, you know, make sure you get that right, whether or not you've got regulatory pressure or not be aligned with that regulatory pressure. A severe impact to a large number of people, maybe not fatal like a misdiagnosed blood test, but potentially dangerous or potentially like some real impact, you know, lots of people losing their jobs. Make sure you got that right. And then systemic thing, you're going to break communications, payments, value, storage, transport, etc. Make sure you do not break any of those. Now not breaking it is, for example, Uber. Oh yeah, the city got busier for a while. The traffic's a little worse. That's just a cost. That's not actually in fact breaking it, but you have to tune towards fixing it.

Excellent. So we spent today talking about the major threats. I think that there really seems like there's this tension between that sense of urgency and responding in a committed, all out way with the recognition that you want to make sure you avoid those false positives where if you respond too quickly to something that isn't actually an existential threat, that's almost as dangerous as failing to respond to the threat itself.

Yeah, it is literally almost as dangerous. Absolutely right.

Excellent as always, Reid. Thank you for the insights today and we'll pick up on the topic of strategy in our next session.

Thanks for listening. This is Reid Hoffman, partner Greylock, host of the podcast Master the Scale and co host of this series on the Gray Matter 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 discussed today or any questions you'd like to ask in the Future, tweet us reylockvc and reidhoffman with AskRead or of course, post on LinkedIn. Chris, Shay and I go through the questions to select questions we will answer on future versions of this podcast. Thanks to the team that produces Masters of Scale and the team that produces this Blitzscaling series, and most of all to you, our subscribers.