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“You learn something every day if you pay attention." - Ray LeBlond
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Proper Tack #56 - 19.02.21

To Blitzscale, or not to Blitzscale


In the parlance of today, blitzscaling is a maniacal focus on growing your company at such a rate that competitors can't keep up and incumbents can't respond. You are doubling, tripling, or more your company every year.

With this growth comes incredible riches. But when you are trying to achieve that growth you may also end up running what could have been a smaller but sustainable company into the ground. Today we look at two different viewpoints from two very successful startup founders turned investors about the relative values of sustainable growth and blitzscaling.

🦓  Is it a good idea to take funding to grow your company to a billion dollars?

📊  You've heard that ad dollars are moving to this channel and that channel, but what does that really mean?

🥡  And as usual, we close out with a grab bag of fun articles.

If you want to help support Proper Tack, please forward this newsletter to anyone you think would enjoy it and ask them to sign up here.

This entry's header palette is BrightZEBRA 1 purple.


1. How Should You Grow?

https://qz.com/1540608/the-problem-with-silicon-valleys-obsession-with-blitzscaling-growth/

Last time around I assigned some light reading, Tim O'Reilly's 9,000 words about blitzscaling. Hopefully you made it through the article over the last two weeks, but if not I'll do my best to cover the high level ideas behind blitzscaling, as well as O'Reilly's criticisms and my own thoughts.

Conveniently enough, I just finished reading Reid Hoffman's Blitzscaling book at the beginning of February (come be my friend on Goodreads) so the concepts were fresh in my mind.

I wore out my Kindle highlighting and writing down notes on this book (71 highlights, 19 notes). And that's not to say that it is an all timer for me. I gave the book 3 stars on Goodreads because it really could've been 100 pages shorter. Publishers, let people write really good 200 page books instead of forcing them into 300+. But I liked a lot of what Hoffman and Yeh wrote.

The concept of blitzscaling is basically that it is inherently better to throw caution to the wind when you have the opportunity and innovative solutions to scale quickly and dominate a market. By opportunity I mean a big market size, good distribution channels, high gross margins, and network effects that will protect your position as you grow. If those conditions are present then it may make sense to raise a lot of money, do things that that "don't make business sense," and try to build a billion dollar company. 

That last piece ladders back to a key idea that Hoffman returns to repeatedly: "prioritizing speed over efficiency." During his time at PayPal, that meant letting fires that they didn't deem critical (like customer support) keep burning while they focused on growing the network. This, as well as the rule about "tolerating bad management," was a major turning point for me where I didn't think I wanted to buy in fully to Hoffman's worldview of growth.

And this is where we transition to Tim O'Reilly. 

O'Reilly started a company called O'Reilly Media that he bootstrapped to hundreds of millions of dollars in revenue, and is now also a venture capitalist at OATV. One of OATV's side projects is a fund called IndieVC, which focuses on an alternative funding structure from the standard VC "take a lot of money and try to 100x it" playbook. Their investing terms are publicly available so you should check them out.

As I imagine you have gathered, O'Reilly has thoughts on blitzscaling. There are two quotes in particular that stuck out to me and made my point better than I could ever hope to.
A strong case can be made that blitzscaling isn't really a recipe for success but rather survivorship bias masquerading as a strategy.
Whoa!

This is exactly the sentiment I felt when reading about what PayPal did during their growth phase. It's not that tolerating bad management allowed them to grow. It's that they grew in spite of bad management because sometimes that happens. And rather than say "wow, we had some bad managers and got really lucky" you tell yourself a story about how it was a brilliant strategy to not have teams, or allow a culture to foster that people "put up with" rather than enjoyed.
In short, none of these companies (except arguably Amazon) [ed note: he's talking about Google, Facebook, Microsoft, Apple, and Amazon here] followed the path that Hoffman and Yeh lay out as a recipe for today's venture-backed companies. Venture-backed blitzscaling was far less important to their success than product and business-model innovation, brilliant execution, and relentless strategic focus. Hypergrowth was the result rather than the cause of these companies' success.
You can't blitzscale a bad product. You can't blitzscale a good product in a small market. You can't even blitzscale a great product that can be easily copied by the existing competitors.

Blitzscaling alone won't solve your problems; and in fact it will introduce a bunch of new ones along the way. Doubling your company every year is taxing on everything from people to process. But if the problem you need to solve is capturing a market with no leader, the tactics that underlie blitzscaling will work.
 
That's why O'Reilly had some great things to say about the strategic parts of Hoffman's book. He's not completely negative on the idea, just on the growing belief among certain investors that this is the only way to grow a company. When you have the market to warrant fast growth and the desire to go for it, the tactics in this book are incredibly valuable. But you don't have to accept that as the only way to grow, and you don't have to accept managerial and customer experience deficiencies in order to get there.

 

2. How is Ad Spend Really Moving Around?

https://medium.com/@RickWebb/five-myths-about-advertising-98ae26dcde46

If I'm not responding to your emails today it's because we're at a company offsite talking with this guy linked above. Rick Webb was one of the founders of The Barbarian Group, and has since gone on to a life of startup investing, book writing, and mountain living.

But he can't seem to pull himself away from writing about advertising. The article above covers Rick's Five Myths of Advertising, but I mostly want to focus on number 3: ‘Ad dollars’ are moving here. Or there. Or whatever.

Webb's point, with data to back it up, is that "ad dollars are moving online" oversimplifies what is happening because there are two different types of ad dollars: brand dollars and direct response dollars. Clicking through his Mary Meeker link you land on an older article that featured this shocking chart about 65% of the way down.



Wha huh?!

Basically, through 2012 the internet had been fantastic at grabbing those "sales activation" dollars away from direct marketing and press classifieds. But "brand building," which makes up a pretty consistent 60% of overall media dollars, continues to be dominated by television ads. TV remains the best channel to tell a story and make an emotional connection.

And no, I don't think that this necessarily stays this way forever (in fact I'd love to see this data with Instagram stories, YouTube, and digital radio included) but I would not be shocked to see the internet continuing to dominate sales activation and struggling at turning ad dollars into brand affinity.

 

More Good Articles to Sound Interesting


Yesterday I was told during a phone call "you seem to run in the right circles, but you really run in some really random circles as well." Embrace those random circles, my friend. There's more fun there.

💵  US digital ad revenues jumped up to $26.2 B in Q3 2018 according to IAB. If you look at Google and Facebook's 10-Q filings (GOOG, FB) for the same time period they earned right around $21B in the US. That's a duopoly, my friends.

🌧️  California is not very good at capturing and using the rainwater that falls on the state. In no small part because doing so is actually really really hard.

⏰  The mindset of a freelancer can be damaging because you conflate time too closely with money. "Those who did so were less likely to take pleasure in leisure activities, because they were too preoccupied by the opportunity cost of their time."

⚽  Do you want to relive Atlanta United winning MLS Cup with a great 12-minute behind the scenes documentary? Yeah, I thought so.

Thanks for making it through another ProperTack email. Please forward on to anyone who would enjoy it.

See you next time.
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