Last Updated on January 23, 2024 by Asfa Rasheed
The race to achieve a $1 billion market capitalization for startup companies has accelerated significantly over time. In the past, it took the average S&P 500 company about 20 years to reach this billion-dollar valuation milestone. However, notable tech giants like Google, Facebook, and Uber accomplished this feat much more swiftly, with Google doing it in eight years, Facebook in six years, and Uber in just three years. To reach such heights, it seems there are two fundamental approaches to growing a company.
The first approach, which can be considered more traditional, involves developing a profitable business model and steadily expanding its operations. In contrast, the second approach, characterized by innovation and risk-taking, entails scaling a business that initially operates at a loss, with the intention of eventually making it profitable. It’s worth noting that achieving profitability may not always be a mandatory step in this second approach. Rapid growth alone can lead to a substantial increase in the company’s value long before it becomes profitable.
The first approach may be perceived as conventional, while the second, often referred to as “Blitzscaling,” has gained prominence in Silicon Valley over the past two decades. Blitzscaling is primarily applied to network effects businesses, where the goal is to establish dominance in an industry before focusing on profitability. Network effects businesses are those in which the value of the product or service rises as more users join the platform. The key concept is that as you attain scale and benefit from network effects, user acquisition costs decrease. Once you become the dominant player in your sector, you can raise prices, ultimately turning the previously unprofitable, fast-growing service into a profitable venture. Watch for bumper stickers for cars that Uber is sending out to it’s drivers, you’ll start to notice how ubiquitous the market is.
Blitzscaling can be viewed as a calculated economic strategy, where the financial rewards of embedding your business into people’s digital lives are so significant that investing billions of dollars to achieve this goal can be justified. This is particularly true in an environment with low interest rates, where capital can be raised at minimal cost.
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Examples of Blitzscaling
Many urban centers today showcase companies that fit this category, such as Deliveroo, GoPuff, and others. While they may not be immediately profitable and may not seem like businesses to own outright, their valuations have surged rapidly. We’ve also witnessed companies deploying rental bicycles and electric scooters in cities worldwide, aiming to dominate the transportation market.
Reid Hoffman, the founder of LinkedIn, coined the term “Blitzscaling” and drew inspiration from the World War II German military tactic known as “Blitzkrieg.” The core idea behind Blitzkrieg was to move rapidly, surprising enemies and committing fully once the decision to advance was made. Similarly, Blitzscaling in business involves taking on substantial risk and moving quickly, which may be necessary for both offensive and defensive reasons.
From an offensive perspective, some businesses need to achieve a certain scale to be valuable, like LinkedIn or eBay, which rely on a critical mass of users. Payment and e-commerce businesses also require high transaction volumes due to their low margins. From a defensive standpoint, being the first to reach customers can provide a significant advantage, as the benefits of scale often lead to a winner-takes-most scenario. In a global context, competitors can emerge rapidly and unexpectedly.
The SoftBank Vision Fund, founded in 2017 with over $100 billion in capital, exemplifies the Blitzscaling approach. It can inject substantial capital into startups, giving them a competitive edge through aggressive customer acquisition and rapid expansion. While this strategy can result in short-term losses, it aims to secure long-term dominance in the market.
Blitzscaling Benefits and Risks
Companies like Airbnb and Uber are prime examples of Blitzscaling success stories. They prioritized growth and market dominance, even at the expense of short-term profitability. However, both have faced challenges in their pursuit of sustainable profitability. Uber, for instance, is now focusing on achieving profitability after years of aggressive expansion.
While Blitzscaling has its merits, it can also have adverse effects on competitors and workers. It can disrupt existing businesses and distort economic growth in favor of well-funded but unprofitable firms. Customers may enjoy the benefits of low prices and freebies, but this model may not be sustainable in the long run. As unprofitable companies proliferate, there’s a risk of price hikes when they shift their focus to profitability.
Blitzscaling may also be cyclical, with firms forced to prioritize profitability during economic downturns, potentially leading to inflation. The current era of unprofitable companies supported by venture capital may not last indefinitely, but as long as investors continue funding this model, consumers can reap the rewards of investor optimism.
Wrapping Up
Blitzscaling has become a prominent strategy in the tech industry, emphasizing rapid growth and market dominance over short-term profitability. While it has led to success stories like Amazon, Airbnb, and Uber, it also raises questions about its long-term sustainability and its impact on competition and workers. The future will reveal whether Blitzscaling remains a dominant force in the business world or if it eventually gives way to more traditional, profit-focused models.
