Reid Hoffman | Bear Market Blitzscaling

Hello, I'm Chris Yeh, the co author of Blitzscaling and I'm here once again with my co author and old friend Reid Hoffman, the co founder of LinkedIn and investor at Greylock Partners. Now Reid, let's start with the broader context. A lot has changed since we released blitzscaling in 2018, both in the startup world and the world at large. What are some of the changes that you think affect the way entrepreneurship blitzscale today?

Well, let's start with a kind of a quick rehash of what's important about Blitzscaling. First, the definition. Prioritizing speed over efficiency in an environment of uncertainty. And naturally part of that is kind of how do you spend capital? You know, whether it's financial capital, human capital, other capital, in order to prioritize speed. And then when capital becomes much more precious, when the capital markets aren't flowing as much, then the degree to which you will spend capital inefficiently is much lower, is a natural outcome. And then people would naturally say, well, that means that of course, during times like now where you have a strongly troubled market, Blitzscaling goes away would be a natural inference. And the reason why that's incorrect is because blitzscaling is always relative because of speed. It's relative motion. And so it's still the question about in business, business is fundamentally around competition. How do you essentially compete for products and services, compete for markets, compete for customer affection, compete for employees, compete for capital? You know, all of this and speed is always a critical function in competition. The times where speed isn't a highly relevant variable in competition are very obscure and kind of more minor things. And so, so then you say, well, okay, so to repeat your question, you know, what are the sudden changes you might think affect the way entrepreneurship Blitzscale? Well, the certain thing is you're going to be very careful about your capital and you're going to be very careful about, you know, where you might be being, choosing to spend that capital in order to outpace your competition. But it's still the case that you will be outpacing your competition. You will be seeking to outpace your competition. Now you may outpace them in longevity, in surviving, in order to thrive. You know, whereas most of the competition, for example, might be telling stories of endurance, you might still be telling a story of market growth. Because by the way, investors still know that that's what they want, right? Presume that you can get there, presume that new capital is hard to come by, but you're still trying to get There. So those are the knobs by which you would be looking as an entrepreneur during a bear market about how you would think about blitzscaling. Whereas in, of course, in a bull market, every possible idea that you could have to possibly use capital accelerate, you might just experiment with and deploy here, you might be much more careful. So it's obviously the knobs are tuned much more narrowly, much more in a contained fashion, but those are the frameworks by which entrepreneurs should be thinking about blitzscaling.

What are some examples of how you or the entrepreneurs you work with have updated those investment theses in order to be successful?

So, as a refresher, part of what investment thesis is, is what are the things that you're betting on, the way the world is, the way the world is moving, and what you can do in the world in order to achieve an outcome, a result. Part of that is like, you know, for example, you might be saying, okay, in the early days of the Internet, it was about transferring files, whether they're HTML files or video files, other kinds of things. And it's the, the distribution of that through search, through portals, you know, other kinds of things. And that was what was kind of key to what was empowering a whole bunch of different, you know, businesses on the Internet. Then you get to Web2 and you say, well, it's about identity and how networks of people work together. And you say, well, okay, the LinkedIn investment thesis is the Web2 identity is going to grow. People are going to be willing to use their real name to advantage their real life, you know, kind of activities and work that actually, in fact, even though there's a lot of counter memes against Putting up your CV, LinkedIn will enable that. There's a set of different business models which will include job seeking and recruiting, but also others that will build over time that LinkedIn, that network can be a platform for all of these things and that both individuals and organizations will all participate in this. And that was essentially the LinkedIn investment thesis of a kind of combination of, you know, what's currently happening in the world, what are the technological trends and then what are the specific things, you know, including providing a service that's focused on individuals owning their network versus, by the way, the competition, which is saying, well, the companies own your professional network, not you, because they provision your computer with your address book and your communications and so on. So they own your network because they thought that owning that data was it, versus the social relationship and the way that you navigate. And that was the investment thesis at LinkedIn. Which obviously worked and elaborated and kind of generated as a way of doing it. Now, part of changing times changes substance of that investment thesis. So it says, well, okay, so what's your availability of capital? What will you have to prove in order to get the next round? How quickly do you need to get to revenue? Do you need to get to free cash flow? Do you need to get to profitability? You know, what is your competition doing in terms of the investment thesis? What do you need to do in order to beat the competition? That's of course part of the blitzscaling thesis that there's a number of important areas, especially in the consumer Internet with network effects, where what we describe as Glengarry Glen Ross markets, where first prize is Cadillac, second prize steak knives, third prize is you're fired. It really makes a big difference between first, second and third places. And so that speed to that and realization of that matters, even of course, in bear markets and everything else. But, you know, competition makes a difference because you say, well, actually, in fact, the competition is all falling by the wayside. The competition is going to die or going to totally retrench and not focus on growth. And it could be something, if you can, that can become a differential advantage. And it's one of the reasons why, you know, people say, well, during recessions or during bear markets, is that a good time to start a business? And the answer is yes, if you can get the capital and you can go because your competition will be far more impeded. It's actually easier to start great businesses during down markets than it is to create great businesses during up markets because of that competition factor. And that, you know, again, one of the things that most people misunderstand about competition is think that primary competition is the large tech giants like, you know, Google or Microsoft or others. And actually, in fact, it's other startups. And other startups are most influenced by capital, availability of markets, capital availability of talent, ability to hire talent, et cetera, et cetera. And that's part of the reason why those, you know, it's such a great time to do that. And that's part of, you know, kind of how you would look at updating your investment thesis because you'd say, well, okay, where does my competition fit in the investment thesis? What is the gameplay that I need to go to to get to the next stage of capital? And what do I need to be demonstrating either the market or in revenue? Classically, during bull markets, in consumer night, you go, hey, I'll get to revenue much later. Everything else is really important. Market capture is most important. Whereas you say, well actually in fact in capital scarcity markets, demonstrating that you can be capital efficient, that you can get to revenue, that you can get to revenue, break even, you know, etc, then become much more important even in raising money, let alone in getting to revenue, profitability and demonstration. And so that's the kind of thing that you're looking to do and that's the kind of thing you would look at as updating your investment theses as entrepreneurs.

You know, I think that's such a brilliant point because it's underscored by our experiences in the past. If we look at a company like Amazon. One of the things that was so great about what Jeff Bezos did there was, was to shift from growth to profitability as necessary. And in fact, Amazon shifted back and forth several times from focusing on growth to focusing on productivity. Of course the overall objective was always growth, to be the everything store. But there were times when Amazon would demonstrate its ability to generate revenues or to be profitable in order to enable it to continue financing its growth. And that was actually a part of their adaptation.

Yep. And exactly. It's part of, look, one of the things that is a really key part of entrepreneurship, part of the reason why we say that great entrepreneurs are in learners is because you're learning a whole bunch of different things and that learning is not learned once and then that's it. Because competition changes, the market changes, technology changes, go to market, strategy changes, market for customers, market for capital. And what you're doing may be differential depending on what's your current position, what are your current assets, what are your current, your capabilities. And so all of this changes what your strategy might be, what your investment thesis might be. And so the fact that it goes well right now we're like, you know, the thing that people like to say is growth at all costs. And you know, that's never quite true. It's always good slogan rhetoric because it's not at all cost. The cost is a fundamental part of business and how you're doing, you're spending that cost in a differential strategy to create a long term valuable business is what good entrepreneurship is, what good business strategy is. But you know, sometimes you may be going growth at highly efficient spends as a way because you're prioritizing growth. And other times you go, no, no, we need to have growth, but we need to have efficiently economically spent growth in order to be navigating the next phase. And that's part of the, okay, focus on profitability here, focus on you know, because you know, there's a lot of different ways of focusing on profitability. Focus on the fact on demonstrating you could be profitable, then an investor might be willing to give you money. Focus on getting profitable, then you don't need money necessarily other than possibly for funding growth. Focus on operating margin. Well then investors might buy and sell your stock at higher multiples and higher prices. And all of that kind of fits into being an intelligent entrepreneur. CEO, founder, business leader.

Now it feels like we're in a bear market right now. Certainly there's a lot less money being invested by the venture capital industry. Does that mean that this is a good time to start a great company? Is that the message that you want to send to entrepreneurs?

100% now it doesn't mean that it isn't hard, much harder to raise capital. So you know, when you're a first time entrepreneur and don't have a lot of background, don't have a lot of network, you may not be able to start a company in this kind of time. You may need a more open, more bulk capital market for someone to be able to take a risk on you because capital will be far more constrained, far less generally available. But on the other hand, if you can start a business and you can raise the capital and you can get going, it's a way to get a lot of differentiation between you and the rest of the possible competitors. And this is actually one of the funny things that I see in talent flows. A lot of talent flows are going, oh, I should go back to kind of safe companies like Microsoft and Google and everything else and do that. And it's like, well look, you can do that totally fine. But it's also a very good time to join the startups that will get through this because they'll actually be worth a lot more because they will have succeeded past competition. Because joining companies is another form of investing. And it's a good time to invest in the ones that actually in fact can get through the down times because their value on the other side will be highly magnified. And it's a similar reason for potentially starting a company now. You have to start a company that you, you know, it's the higher beta to a higher alpha, you know, kind of outcome where you say, well, if you can pull it off, if you can get finance, you can get it started. Now's a really good time, it's harder to pull off. And so therefore you might also decide to defer because you know, making intelligent ABZ decisions about your efforts to refer to the startup view is a key thing to do.

Now, speaking of investing, we've discussed earlier how there's less venture investing going on than before. I also see a lot of venture capitalists out there telling the entrepreneurs, hey, listen, I don't know if you're gonna be able to raise any more money. Get five years of Runway, get to profitability however you can. At the same time, I'm hearing from you that this is a great time to start a company. This is the period of time exactly when great companies get started. So what's the deal there? I mean, should people be trying to just get five years of Runway? And is it right for venture capitalists to be so conservative right now? How should we all be thinking about this?

So, you know, there's not one simple slogan because it depends on the circumstances that you're in. That's part of the reason why. And what you think you can achieve, what your level of risk appetite is, what your ability to navigate risk. That's the gesture at the ABZ planning, because it's a risk planning and mitigation framework to navigate risk intelligently. And so it depends. So for example, if you said me as an entrepreneur, well, I started working on LinkedIn in 2002, which is still deep in the dot com winter and kind of working my way through that. That was a good time to do it. I was able to do it because of the success of PayPal. Similarly, I would do that as a investor. I'm active because I actually think the right projects done now will have a higher ability to succeed. And so that's also positive in doing this. On the other hand, there'll be lots of startups that fail or fail to get off the ground. And so that's not saying, oh no, no, it's going to be, you know, great times all around. And that's part of making good decisions. You know, having the, the intelligent risk frameworks applied, navigating and pivoting and changing based on the things you're finding, getting really good advice, having that advice be, why would this fail? Why would this not work? Because not having an irrational belief in just the success of what you're doing, but approaching it in a risk intelligent and a strategy intelligent way. Those are all the, the concepts apply, which in some cases will be really spectacular. But obviously you have to navigate more landmines and speed bumps and, you know, death traps and pit holes as part of doing it, because that's part of what a, a bear market means.

It sounds like obviously risk management is always Important. But it sounds like in a bear market risk management becomes one of the most important things you do. And it's again, you have to do it intelligently. It's not just slow down and don't do anything. But it is not the go, go bull market. Hey, try as much as you can.

Yes, One of the key differences, which is well teased out between bear markets and bull markets is what is the cost of error and how severe might the error be. And in bull markets you can frequently just kind of raise some more capital, you know, kind of readjust to the mistake. In a bear market you tend to just get hit and it can be unrecoverable. So you, you're much more careful about error. Again, there's part of the thing about all entrepreneurial business is that you will be taking risk. And so taking it intelligently, taking and how to navigate it is still there. There's no way to be risk free. But like you're taking fewer risks, you're, you're managing them more carefully, you're adjusting more quickly. You know, like the fewer risks with higher cost is the usual pattern in a bear versus a bull market.

And we've spoken a lot about playing defense, but how about the opposite? How about playing offense, right? The entrepreneurs can't win solely by playing defense. They have to think about how they're going to silver linings and figure out what they can do to go ahead and win that market.

Well, generally speaking during bear markets, because of that higher cost and incidence of failure costing a lot more, a mistake costing a lot more, what you first do is kind of cross check all your defense, right? It doesn't mean you stay there. There's subtle second order effects like, okay, what's going to happen with my customers? And my customers will be buying less, buying more slowly, you know, asking for discounts, failing to renew, going out of business themselves. Advertising is one of the more optional spends that businesses throttle down during bear markets versus bull markets and so forth. Now that being said, then whatever you can play on offense usually is a massive differential because a lot of your committers won't be able to play offense. Like if you can go spend money on advertising, advertising could be a lot cheaper and then you can grow in that way. And so once you've cross checked the defense game, then playing offense is intelligent and important to do because it's precisely you get a magnified outcome. And it's part of the reason why you can create a much more successful entrepreneurial business. When you could do it, you get A magnified outcome because so few of your competitors will be able to play offense.

One of the things that I think really helped along the way at LinkedIn is I think you mentioned before how our friend Dave Z. Gave you great advice to raise money right before the global financial Crisis hit and LinkedIn was well capitalized at that point in time. As a result. What are some of the ways that you're able to take advantage of that and play offense under those circumstances? What are some of the things that you did to take advantage of this kind of advice?

So the kinds of things that, you know, we did was, you know, and obviously this is survivor's bias, so I think it was smart, but it was like, you know, there's always a certain amount of fortune and luck and all this stuff, you know, like, for example, we said, look, because I had money from PayPal, I did the initial seed where it might have otherwise been very hard to raise a seed. I then, because of the success from PayPal and getting money from great VCs like Greylock and Sequoia, you know, could then say, oh, we're going to be one of the ones that's going to be really successful. We could recruit talent that way. Then, you know, we said, okay, well, we aren't going to be focusing on revenue, but we're going to keep costs really tight and we're going to go consumer as a way of doing it. Whereas when you're enterprise, you have a sla, you know, high cost of serving, you also have to have a Salesforce account management, all the rest. We say, look, we're not going to have any of that. We're going to focus entirely on product and development. We're going to use viral marketing as the way we operate. We also had the benefit as that was one of the times where the Internet was boring and there was relatively little going on. So we could get a certain amount of attention from everything, from, you know, individuals willing to experiment with the service and send out invitations, even though there wasn't a lot of functionality to press writing about it again, you know, because, you know, the Internet was boring in part because it was in the Internet winner. And so a whole bunch of companies had died. Probably a lot of people, young people don't even know, older folks knew this and remembered it. But there was this site called Fuck Company which was entirely about dancing on the the graves and soon to be graves of companies and describing them as totally idiotic ideas. You know, this is again one of the classic ways that Silicon Valley and its Learning network and entrepreneurs learning tend to be misunderstood. It's like, oh, they were idiots because they would chart all these businesses that didn't have business models. I was like, well, the next generation are really valuable. Businesses didn't really have solid business models either, you know, whether it was LinkedIn or Facebook or others. Because what we learned was, no, no, actually you still get the network to scale and then you have to innovate on the business on top of it. And the different business models and you know, one Facebook, more advertising, one LinkedIn, more subscription and enterprise services, you know, et cetera, as ways of doing this. But that's the, the way that these things play out and that's the kind of thing that you're looking to do as an entrepreneur. You know, in these times now we've.

Been speaking a lot to entrepreneurs and of course that's the primary audience we had in mind when we wrote blitzscaling. But the ideas of blitzscaling and now blitzscaling in a bear market are presumably relevant to other groups like the leaders at established companies, entrepreneurs outside the business world, the regular employees who just work at these blitzscaling companies and their competitors. What advice do you have for the non entrepreneurs about blitzscaling in a bear market? What are the key lessons they should be thinking about whether they're a company leader or just an employee?

Well, again, just the application of things we just talked about, which is, okay, treat cost of risk and failure as much higher. Focus first on defense and then move to offense in terms of general strategic play. Try to get to offense, don't forget it. But like, you know, focus through that in as much as you're kind of choosing, you know, where to have a job, you know, staying moving, etc. You know, similar set of principles. That was the reason why like, like one of the mistakes, everyone goes, oh, go to the, the wealthy large companies. Yeah, that might be the right case for a number of individuals. But by the way, going to the right startups is a great time to do that as an instance. And so those would be the, the kind of things to think about. And then also of course, by the way, you know, part of how careers are made, like just reflecting back on my own career is, you know, PayPal was a canonical, you know, kind of go through the Internet winner. It was one of the only two tech companies went public in 2002 and to pull that off and was raising capital during that and it was taking a whole bunch of risks in order to get there. But to get through it, not Only did it make a whole bunch of people, you know, a bunch of money, which then, you know, they went on to parlay to, you know, creating yelp and creating YouTube and a bunch of other things. But also, you know, part of it was the careers. Like, that's part of the reason why the PayPal mafia is still referred to, why even I'm referred to as kind of the, like a part of the PayPal mafia, as part of my thing. But, like, it's the careers, that same kind of offense and amplification can be the right kind of springboard to a lot of amplification. And that's whatever kind of professional you're doing. Those are good things to keep in mind as you shift to acceleration and offense, once you've thought through the kind of defense and risk management.

And I think that that is really important advice because I think a lot of us look at the balances in our bank accounts or brokerage accounts, we're feeling a little down. Maybe the numbers are smaller than they were before. But what your advice tells us, Reid, is this is actually a very promising time to either build a company or perhaps join a company that is on a track that no longer has as much competition for the financial and human capital that they need to grow. And that this is something where, yeah, all of us should look to our defense first, make sure that we have enough money, whether as an entrepreneur or as an individual. But then once we've secured our defenses, think about offense, think about what we can do to take advantage of this particular time, all the change that's going on, all the opportunities that perhaps weren't open to us before. And that's something that really helps me be optimistic about the future, which is something I think we can all use right now.

Yep. And ultimately, the way that entrepreneurship is one of the very key ways that you pull out of bull markets and recessions and other things, because you're creating the new kinds of products and services that people will buy, will create jobs and then creates that. That flywheel going, you know, fundamentally, once the economies get going, it has a natural growth characteristic. Entrepreneurship is the starter motor, the scale motor, the driving motor for how these new companies, these new products, services, these new jobs are created. And that's part of the reason why to be not just optimistic, but engaged and to create the future.

Well, Reid, I think that that's a fantastic note on which to conclude. So therefore, that concludes this episode of Gray Matter. You can subscribe to gray matter on soundcloud.com greylock partners you can also find new episodes and blog posts on greylock.com and you can follow Greylock on Twitter reylockvc. I'm Chris Yeh, and on behalf of Reid Hoffman, thank you for listening.