The Risks And Rewards Of Being A Blitzscaling Founder & CEO with Josh McFarland | Greymatter

Hi listeners. I'm Reid Hoffman. This next episode of Gray Matter dives into sections of my new book, Blitzscaling the Lightning Fast Path to Building Massively Valuable Companies. We share stories and advice from entrepreneurs who've grown companies from zero to a gazillion. To learn even more about how to scale at a dizzying pace and blow competitors out of the water, you can pick up my book on blitzscaling.com, amazon or at a US bookstore near you. Enjoy. Greylock Partners Podcast Grey Matter thank you.

Hi everyone. Welcome to Grey Matter Greylock Partners podcast that offers perspectives and stories from some of the world's top entrepreneurs and business leaders. I'm Chris Yeh, co author of the new book Blitzscaling the Lightning Fast Path to Building Massively Valuable Companies, which I wrote with my friend and greylock investor and LinkedIn co founder Reid Hoffman. This episode is the third in a five part series where we host several investment partners from Greylock to discuss their experience building tech companies from startup to scale up. Today I'm joined by greylock partner Josh McFarland. Josh was co founder of Telepart before it was acquired by Twitter for over $500 million, the largest acquisition in Twitter's history. And as an investor at Greylock, he's backed Coinbase and several yet to be announced companies. Josh, it's great to talk with you today.

Awesome to be here. Thanks Chris.

So Josh, what we want to do is really dive into your entrepreneurial experience and then transition from there into your investor experience. So let's talk about how you decide when to start Blitzscaling. That's something that founders really ask about a lot. And, and one of the things that I found in talking with founders and experienced executives is that it's counterintuitive. It really goes against a lot of the established rules of business. So how do you approach this subject either as an investor or as an entrepreneur?

Yeah. So I'm going to tell you a couple of stories from the telepart journey and to level set here, we scaled to over $150 million in revenue in about five years, which is pretty fast. But I will tell you, probably my biggest regret is that we didn't scale fast enough. So telepart was started by me and my co founder. We left Google together and we became entrepreneurs in residents at Greylock. Greylock led our Series A in 2009 and we started building the company and about 18 months into that journey we came back to the partnership to do an update on how things were going and I Remember sitting here in this very boardroom and giving the presentation to the partnership. And in 18 months we were on probably a 3 or 4 million dollars revenue run rate and there were only 5 or 6 of us working at the company. We were tiny. We were incubating out of some extra office space that Greylock had. So we kept our burn really low and we had a handful of really marquee customers in E Commerce. And so I remember giving presentation to the partnership and the last slide was a bit of a victory lap, if you would. It sort of recapped all of the amazing things that we had done. And I think the very last bullet was something to the effect of. And we still have 85% of the series A in the bank. Right. And I pause for dramatic effect and. And I'm expecting, I don't know, maybe at least a golf clap from the group. And it's silent in the room. And Aneel Bushry, who is now CEO of Workday, who of course is Greylock partner, very, very successful investor, paused and sort of looked at me and he said, if I can just ask a question. I said, yeah, Neil, go ahead and I'll paraphrase. But it was something to the effect of, what are you doing? And I'm thinking, well, what do you mean we're killing it? We're making all of this money and spending almost nothing like, what could be better as a business? And he said, look, you are onto something here. Look at your revenue, look at your traction, look at your customer list. You should double down, you should raise more money. I don't care if you have all of the Series A in the bank. You should use this opportunistically to go out and add capital and use capital as a weapon. And I remember just coming out of that meeting in awe with a very different perspective about what it meant to start this next chapter of blitzscaling for us. And so when you asked me this question about when is it the right time? I think this is where board members who've seen this before, where you get an investment partnership like Greylock, where we've seen so many of these companies go through a scale up phase that they can help, certainly helped me as an entrepreneur say, like, okay, now is the time to step on the gas. Now's the time to even raise more capital because it's going to be easy because then you can use it as a weapon so that you can win your market.

Yeah. And I have been through a number of board meetings with Aneel as an entrepreneur or a member of a management team. And he is both incredibly insightful and also just slightly terrifying at the same time because he's so accomplished. But his point was, I think, very important, which is you came into that meeting thinking, I've done great because I've only spent 15% of the money and I've been super efficient. And. And in contrast, what Anil was saying is, no, actually if you're onto something, you should be prioritizing speed over efficiency. You should be getting there faster. And that's sort of the core of Blitzscaling. And the reason you want to do that is because you want to be the first to scale. You have to have the first scalar advantage. Now, can you talk a little bit about the role that first scalar advantage played at telepart and how did you know that you had an advantage there and that you were going to avoid giving it up?

My co founder and I, as we were leaving Google, we had unique insight into some of the infrastructure that Google was building for the ads industry. And because it was the last project that I led on the way out, I knew what was coming. And so we had really an early look at the industry that was about to be created on the back of this new technology infrastructure that Google was building called the Real Time Bidding Protocol. And we knew that we had a limited amount of time to build technology on top of that platform as in fact one of the very earliest companies to start publishing against this protocol so that we could get bigger, faster than all of our competitors. We honestly didn't go fast enough. So I mentioned that at the beginning, but I look back and I just, I see the mistakes and the missteps as all I think good entrepreneurs do. And one of the things that we moved on quickly but not quickly enough was in locking up all of the customers. And so when I think about how I advise portfolio companies now, as an investor, one of the things that I tell them is every customer that you don't win in the early days is a customer that is going to take years and years for you to pull away from your competitors. So when you're in a greenfield opportunity, when you've got this brand new market that's being created, you have to be out there signing up all the accounts. And per many of the lessons in Blitzscaling, it feels very counterintuitive because you don't feel like you can do as good of a job for every account when you're bringing on so many more customers all at the same time. And that's true, you are actually going to be doing a slightly subpar job for all of your pre existing customers because you're scaling so quickly. But all that matters is getting those logos today, because if you lose them, if you lose the revenue opportunity from any one of them, it's money and opportunity that you'll never get back. At least not for years and years while you try and claw them away from your competitors.

Yeah. And so many of the elements of blitzscaling may seem risky. We're going to be inefficient, or we're going to do a subpar job for our existing customers. But one of the things we like to emphasize is that in fact, oftentimes the greatest risk is not taking on enough risk. And it sounds like that was the feeling you had looking back on the telepart experience.

Yeah. I think also as entrepreneurs, we're perfectionists. We want everything to be perfect inside of our company, with our culture, our perfect relationships with our customers. We want a perfect net promoter score of 100 from everybody that's ever done business with us. But if you were really to try and achieve that, you would just be constraining the total opportunity that you have before you. And if you believe in what you're doing and if you believe in your team, then you know that it is a better thing for the world to get your technology and software exposed to more people, more customers than it is to do a hyper perfect job for a much smaller group. And I think this is something where a good board can really help the entrepreneur sort this out. And so if you look at the relationship that I had with Greylock, with my board member, James Slavitt, who's now our managing partner, I always characterized it with this phrase, tough love. And it's the ability for a board member that approaches a situation with love for their entrepreneur, but also toughness, because they know that you want to succeed and they want you to succeed. They want you to succeed at scale. It's the combination of those two that help the entrepreneurs see the opportunity and scale to that opportunity, even when, as you just pointed out, it can feel so counterintuitive and it can almost feel bad. Right. Because you are not doing as perfect a job as you would want to. And yet it's the right thing to do. And a great board member can help you sort that out.

And that's a gigantic transition that happens when you go from being a contributor or manager at an established company to being the founder or of a blitzscaling company. When you were At Google, you were rewarded for doing a great job, for achieving that perfection or getting close to it, and all of a sudden you found yourself in a situation where you needed to do the opposite.

That's right.

So now that you have gone to the other side, so to speak, from entrepreneur to investor, it's you who's sitting on the board and providing that advice to entrepreneurs. And one of your well known investments right now is Coinbase. Obviously they're in a very hot space. There are a lot of competitors in the overall space. Talk about how you have that conversation with the founders over at Coinbase. What kind of advice do you give them? How do you help them avoid the pitfalls that you ran into?

Yeah, so Brian Armstrong and I have become good friends over the last several months and he and I have traded a lot of sort of heart to heart thoughts as founders. One thing that people forget about Coinbase though is that Brian's been doing this for six years, right? Cryptocurrencies are the crypto asset markets right now. They're hot and they're sexy and it's like the six year overnight success. But if you look at what he's been doing methodically from day one, it's building a company that was preparing itself to blitz scale when the time was right. And so if you look at what they did early from the regulatory perspectives, from building consumer trust, from making sure that they had the best in class security, that their anti fraud measures were in place, these things collectively have built a critical mass of a consumer brand that has put them in a position where they can now enact the blitzscaling. And I think the hallmark of the success that they are having right now has to do, and I'll borrow this analogy really from astrophysics, it's around the gravity that the company has created for itself, right? And so if you think about mass creating gravity in the space time continuum, it's like the bigger something gets, the more gravity it has, the more it gets attracted to it. Therefore, the more the mass grows and the more gravity is created. And that's what's happening with Coinbase right now. If you look at the hires that they're making, whether it's Tina on the operations side, who I worked with closely at Twitter, or Asif as coo, or if you look at even the acquisitions that they're making and they brought on Balaji Srinivasan as their cto, the company just continues to outperform even the hotness of the market. And that blitz scaling, it has its own Property where the company continues to succeed, because it's succeeding. And I've found Brian to have really embraced that. And you can see this in his own tweets and the blog posts that he's been putting out recently. I mean, he is achieving a new level of leadership. And what's been really impressive to me is to see him, in some ways, let go of the reins of the operational perspective as he brings on some of these incredible executives and and up level himself in terms of how he approaches his company and how he conveys the mission as they're going through this radical inflection point in their own hiring.

Now, that brings up a really interesting topic, which is the fact that the role of the founder changes as the company grows and as the company blitzscales. That's something you experience personally yourself, and that's something that you witness with folks like Brian. Can you speak a bit about some of the major changes or transitions that either you went through or that you've seen other people go through as these companies scale?

Yeah, absolutely. One of the biggest transitions that I felt personally was the change from thinking of myself as founder to thinking of myself as CEO. And this happened probably two to three years into the company's life. And I remember I had gone out to dinner with Phil Libin, who was at the time CEO of Evernote, and he was a good friend and a mentor. And we had had dinner just after a year where he had scaled to call it seven and a half million dollars in revenue. Right. We had more than tripled in size. We were approaching a $10 million run rate, but things were just coming apart at the seams. The technology we needed to basically do a big refactor because we're having orders of magnitude more growth than we expected. They were the failures of success, right? The best kind. And yet it was a super stressful time for the company. And I remember sitting down with him at dinner and just feeling like it was probably bleeding from my eyes because I wasn't sleeping enough and I was stressed out and. And we were trying to hire and change the organization and change the technology and onboard new customers, all this stuff at the same time. And he sort of listens to me, just kind of commiserate with him over the high growth period challenges. And that lasts for probably 30 minutes of the dinner. And then he kind of pauses and he says, great, so what's your plan to get to $100 million in revenue? And I remember just looking at him being like, dude, did you not just hear everything that I told you for the last 30 minutes, like, I am dying here. And he says, yeah, yeah, I hear you, but what's your plan? Because you have to get to $100 million in revenue. Otherwise all of this strife that you're going through, it's not worth it for your team. And I took a pause, and then after the dinner, I remember going home, and I tend to do a fair bit of journaling, so sort of a form of catharsis for me. So that night, I remember writing my journal like, he's right. I have to have a totally different approach to this thing if we're going to go from $7.5 million to $100 million. And that began the process of me taking off solely my founder hat and putting on this new CEO hat, hiring executives that I never thought I could get, hiring for the company that I wanted to be, not the company that I was. And it was within another three years, and we had surpassed the $100 million mark.

I gotta tell you, the expression everything was coming apart at the seams is probably one of the best descriptions of the feeling of being a Blitzscaling founder and CEO that I could ever possibly imagine.

Absolutely.

And the other thing that struck me is that throughout your journey, you've had these great mentors, people like Anil or James or Phil, who helped you see what you needed to do. I don't think that that's just a coincidence. How did you find these kinds of mentors, and how did you make them a part of your world? And how did you operationalize their advice?

That's a great question. I'll be honest. I am blessed and feel incredibly lucky to be exposed and be around these people. I would like to believe that they saw in me what I look for in entrepreneurs now. You just come across certain people in your life and you see that they have this added drive, this added spark, this thirst for knowledge. And I personally find those people attractive. I want to spend more time with them. I remember when I joined Greylock, I sat down with Reid and I said, teach me about what you've learned in venture capital. What are some things that I can learn? And we ended up talking about his investment in Airbnb. And I said, what was it about that investment at that time that gave you the confidence to lead what was a meaningful round in a company that everybody else thought was a silly idea? And he said, look, I think what it came down to is I saw in Brian Chesky somebody who was just so thirsty to learn and somebody who was so Hungry to make something huge. And when I come across those people, I just find myself wanting to spend more time with them. And I think that the most impressive and important people in my life and that's what I'm looking for when I try and give back to entrepreneurs.

And that desire for learning is so important. One of the things I think is so funny in working with someone like Reid, who of course is incredibly accomplished, is that after any event, after anything where he's been on stage, his very first question when he comes off is, how could I have done that better?

Yeah.

And for someone who's achieved as much as he has, to always be seeking ways to get better, to learn more, indicates how we should all approach our lives.

Yeah, absolutely.

So one of the elements of the book that comes out is that we think about companies belonging to different stages. So there are the family stage, tribe, village, city and nation. And you went through a couple of those stages at Telepart. And you're also observing companies go through those stages now. Can you talk about some of the big changes that happened stage to stage, some of the big adjustments that you made along the way?

One of the points that I like that you and Reid make in this book is around the fact that when you are blitz scaling, you keep coming up against the same, same problems and you have to solve them differently. And I remember having this discussion with James Slavitt on my board. We were sort of joking and it was very light hearted banter before the board meeting. And he said something like, it's not going to get any easier, but it will get different. And that is so true. It never gets easier. These problems, they keep coming up over and over and over. And you think that, okay, all I have to do is get past this next hill, this next hurdle, and then things will go get easier and they don't. And it's not even that you've solved one problem, that problem never surfaces again. It's that when it surfaces again, it's different and you need to solve it differently. And so I think about the big scale challenges that Teleport had along the way. Three buckets. One is logistics. It's tautological to say, but when you're scaling your company, you have to scale everything. You have to scale the processes, you have to scale the office space. And so one way that we solved that is we took over a big building, I signed a master lease and then we ended up subletting out parts of it until we needed the rest of the space. Another big challenge is always hiring and it's not just putting butts in seats. It's that you've got to hire for the executives that will be able to run the company that you're going to be someday. And so if you look at, for example, my VP of engineering, Wade Chambers, who's now CTO at one of our portfolio companies, the scale at which he operated was so far beyond what telepart had at the time, and yet I knew he was exactly the executive that we need for the company that we wanted to become. So you're always hiring beyond the level of people that you have, and you're hiring beyond the need that you have right now. And then the final is really around communication. This is something that was drilled into me by Jeff Weiner, who was actually an executive in residence at Greylock at the same time, was an entrepreneur in residence. And this is before he took the CEO job at LinkedIn. He and I became close, and as he scaled LinkedIn, I remember talking to him one time and he said, look, when you think about how you communicate to your company, think about it like this. You will say something over and over and over, over again in exactly the same way. You have to use the same words every single time. Don't get clever. Don't try and ad lib. You want to go in and say the same thing in the same way over and over. And when you are blue in the face because you have said it so many times, it's only that moment in which you should know that your employees have started to hear what you've said. They don't even understand it yet, so keep saying it. And so I found that the ability to continue to communicate and to layer the communication and to change the way that you communicate at the different levels and sizes of the company, it was the same problem solved in different ways at each stage. But I would say those three things are among the ones that will continue coming up for founders over and over again.

Absolutely. And this kind of concrete advice is exactly the reason why entrepreneurs need to have investors who've been operators, who have been through this before, who can help relate to them some of the ways that they've solved those challenges in their own life.

Definitely.

So, Josh, as you're talking with entrepreneurs like Brian, they're already bought into the notion of moving quickly. But how do you get them to move even faster? How do you advise founders to accelerate if they're already sprinting?

Let me answer that with my own experience. So In January of 2014, I remember getting together for a board meeting. And I walked into the room and I said something like this to the board. I said, okay, team, I'm going to bring you some crazy ideas. This year. We are going to double the size of our office. We're going to triple our headcount. I am giving everybody in the company a raise to get them up to what I think is the new market. We're going to go out and acquire companies for cash. We're going to use the cash that we have on our balance sheet to acquire other companies, other teams. And I want you to remember something. Whenever I bring you one of these crazy proposals, just remember this. It's all 40% off. And the board looked at me and they're like, don't really understand what you're saying. And I said, look, I just finished closing out the books for last year. We now have become so profitable as a company that we have no more what are called net operating losses. So those are the things against which your future tax bill starts to get decremented. And so I said, this year, we will pay taxes. So at the time, the corporate tax rate was 40%. So every dollar that we could spend in search of growth would effectively be 40 cents that we didn't have to give up in the way of taxes. Now, I have no problem against taxes, but I definitely believe that a dollar's worth of investment in my company was better in the long run of the outcome for everyone involved, including the federal government. And so it was my way of saying to the board, we are going to go faster, and this is going to be uncomfortable. This is going to feel very strange compared to the phase that we just went through. And when I talk to my founders now, I try and help them project what it's going to feel like when they start getting that flywheel of their business going and they don't want to get in that situation that I found myself in, which was really closing the books, only to realize that this was about to happen instead, I think if you can look forward and you can say, okay, this is going to happen, how do we assume that that is going to happen? How do we just feel it in our bones that this success is going to accrue and start acting as though we're already at that level of success, because we really, really believe that the business is going to achieve that. And not in a disingenuous way, not in a lying to ourselves kind of way, but really in a here is a set of facts that if they play out in the way that we believe that they will will come true. And it's okay to act as aggressively today as if those were true when we know that they're going to be true within the next 6, 12, 18 months.

And so it sounds to me like what you're saying is it's really important to both manage the expectations that people are looking forward to and to try to see around the corner so that people don't have to wait until they have the black and white numbers to tell them they should be scaling faster, that they're making that decision as early as possible.

That's right. Another way to put this is fake it. Till you make it right, you have to believe that you are going to be successful, that your business is going to be successful, that your team will be able to scale to the success in order to act as though you are successful in order to become successful.

So let's think about the other side of that equation. There are times when a business outgrows its current strategy. Its growth starts to slow, and then you need to change course. How do you know when it's time to start thinking about new business lines? How do you know how to effectively change course without totally disrupting the company?

Yeah, this is another instance where a great board can help you see around these corners. And I remember as I was looking at our own financial forecasting, it became very clear that it is hard to continue doubling or tripling revenue as you start to reach hundreds of millions of dollars in size. And in our last year of operations before the acquisition by Twitter, we had actually started experimenting with new business units where I was assigning separate general managers to the business units in an effort to get them kickstarted to supplement the growth rate of our core business. And this was a technique that we used at Twitter as well. When Jack returned as CEO, I remember sitting down with him and we're discussing different forms of organizational design. And he said, a lot of people assume that most of Silicon Valley is run like Google or Facebook, where everything is functionally aligned, all of engineering reports to engineering, all product reports of product. Or at least that was true for the longest time for both of those companies. He said, there's other organizational designs as well. Look at Apple most famously, or even what he employed at Square. And so when he came back, we split the product team in two and there was a consumer product team. And then I ran all of the business facing product team. And so that was everything for ads and monetization, but also customer support. Really, anything that touched a business rolled up to me on the product side, and anything that touched the consumer rolled up to another general manager. And the reason that we did that was so that we could free ourselves from the constraints of a too large organization and trying to make these very, very disruptive decisions around what to keep, what to shut down, how to sort of reinvigorate the growth at Twitter. And so as these companies scale, part of my advice to founders is don't assume that the organizational design that you've had is the one that's going to make you successful going forward and be willing to experiment and be willing to do things that are even in a hybrid manner. So at Twitter, for example, even though I ran all of the product and engineering side, I didn't have the full P and L responsibility that you might expect of a general manager. And, and that was something I think that worked really well at the time. And that you'll see all of these organizations continue to experiment with going forward, but can be a very helpful way of continuing to find growth even as those numbers get massive in size.

Now, Greylock is known for investing and advising early stage companies. As you mentioned. Telepart, for example, was incubated within Greylock. And I imagine that the companies that you're investing in are companies at the early stages. Is there a particular reason you like to focus on this stage and how do you go about advising them about Blitzscaling when you're dealing with these early stage companies?

One of the reasons that Greylock focuses on the early stage is because of the background of so many of us as investors. We are tried and true operators. Many of us are founders, early executives of companies that went on to achieve massive scale. And across the partnership, everybody has this sixth sense of what it means to grow into being a successful company. And that sixth sense really matters in the earliest phases, where it's very unclear that this thing, this company, this team, is going to be as successful as we expect them to be one day. And so investors oftentimes will use this phrase, pattern matching. And I think really as a result of me now having been on the investing side of the table for a little over a year, that I really get what people mean when they say that. And if you can pattern match your way into an opportunity with a great team in a growing market, that's when Greylock as a firm can bring the knowledge that we have around things like Blitzscaling to help these entrepreneurs. And I think the challenges that you have from 0 to 100, whether that's 100 employees or $100 million, those are very, very unique challenges that there are not a lot of people in the world that are equipped to help entrepreneurs deal with those challenges. There's lots of people and there's, you know, entire cottage industries that can help when you get to scale or when you're getting ready to go public or investment bankers and all the like, you know, growth stage capital. But I really find those challenges of the early days are best suited to people that have done it before, either because they've been in your shoes as entrepreneurs or because they have seen it so many times and in so many successful ways that they can help you see around those corners.

And I think that you really got to the heart of matters when you said, in these early stages, there simply isn't the data to make these kinds of decisions with confidence based on the data. And I think that people have this desire to say, well, we'll be able to figure this out. We'll have all this evidence, and that's just not there. It takes that experience as an operator, as support, someone who's seen it many, many times, to be able to, on an unconscious level, figure out what to do and how to adjust along the way.

Yeah, absolutely.

Now, we are currently in the midst of, I think, the longest bull market, the longest sustained economic boom in decades. And so, of course, at this point in time, a lot of people are looking to start companies, but inevitably, the business cycle does turn. And you, I believe, started telepart during the recession. You founded and scaled the company in a very grim economic time. A lot of people think that blitzscaling is just for good times, but it sounds like this is something you did during bad times as well. Can you talk a little bit about how you adjusted in order to compensate for the economic times?

Yeah. My co founder and I used to joke that we left Google probably during the worst time ever. We left In September of 2008, a couple weeks before Lehman Brothers blew up. Up right as the world was just becoming a total disaster. And then we founded the company officially a little bit later. But if you zoom in on the consumer confidence index, it was absolutely cratered. I used to joke that if you zoomed all the way into the lowest point in the consumer confidence index, you would see my co founder and I standing there with a flag planted. And the pros and cons to starting in a recession are fairly obvious. Right. The cons are that it is really hard to raise money. And so for Greylock to take a chance on us as entrepreneurs and having seen us incubated, this company was A great honor. In fact, we were the only series a deal that Greylock did in the year that we spent inside the firm, both as entrepreneurs and residents, and then incubating the company. And on the other hand, there's not a lot of noise. Everything is kind of quieted down. And so it was actually easier for us to get the attention of candidates and to start building our engineering team because there wasn't just the same amount of noise in the market as people recruiting. A lot of companies were laying people off and we were hiring. And so it gave us kind of an edge out there in the marketplace. There's no bad time to start a company. It is equally hard in good markets and bad to get these things off the ground. And so if you're a dedicated entrepreneur and you have an idea that you are excited about, just go for it, because it's never going to get easier. And quite honestly, if you start it in a downturn, it's only going to feel like it's getting easier compared to where you start.

Now, on a personal note, I've heard that you're a big fan of electronic music.

I am.

Can you talk about how these different threads of your life come together? How does the love of electronic music influence the way you see the world? Either as an entrepreneur or investor?

It's amazing. I have made so many friends in technology who are equally in love with electronic music that the two communities just flow very seamlessly right now. I think just the ability to blend work and life in this industry. We're so lucky to live in Silicon Valley where that is not just allowed, but is also celebrated. I really appreciate that I can have strong friendships that blend into the working world as well. I think those two communities mesh very well together.

Well, Josh, thank you for coming in and sharing your insight on best practices for scaling massive companies here on Gray Matter today.