Chris Yeh is an entrepreneur, investor and author of several books, including two with the founder of LinkedIn, Reid Hoffman, the most recent of which is called “Blitzscaling.” Today we cover the fascinating topic of blitzscaling – how to scale a business in record time, how to take advantage of significant market opportunities that are in front of you, how to focus on distribution, and leverage network effects.
Whether you’re a founder, a CEO, an investor in early stage companies, a developer, or leading a business unit or a function in a large organisation which might be at risk of going ex-growth, you’ll learn valuable lessons from a lifelong learner such as Chris Yeh.
Mark Bidwell 0:39
Hi, this is Mark Bidwell, and welcome back, or welcome to OutsideVoices.
With me today is entrepreneur and author of several books, including two with the founder of LinkedIn, Reid Hoffman, the most recent of which is called “Blitzscaling.” And this is a subject of our conversation today. So whether you’re a founder, a CEO, or an investor in early stage companies, a developer, or even leading a business unit, or a function in a large organization, which might be at risk of going ex-growth, there’s a huge amount in here for everyone. This is a fascinating topic, about how to scale a business quickly, how to take advantage of significant market opportunities that are in front of you, how to focus on distribution, and leverage network effects. There’s a lot in here, it’s a fascinating methodology, not for everyone, and not for every business either, but I think you’ll find there’s stuff in here which you can learn from. Chris is a lifelong learner, very experienced in this space, and without further ado, here is Chris Yeh. Welcome to the show, Chris. How did you come to write a book with Reid Hoffman?
Chris Yeh 1:59
Well, that’s another classic example of the power of networks. So the relationship I have with Reid goes all the way back to when he was starting LinkedIn. What had happened was, I was tracking the nascent social networking space very closely. One of my friends, Jonathan Abrams, is the founder of Friendster, and he told me about what he was working on, and I was like, wow, that’s such a great idea. It was 2002-2003. When Friendster came out, right around the same time, LinkedIn and Tribe also came out, those three sort of came out as a class, and in fact, Reid and Jonathan and Mark Pincus were all friends. They had sort of carved up the world, if you will, with Friendster being for individuals, and focused on the consumer and dating and things like that, Tribe being focused on groups, and then LinkedIn being focused on professional social networking. And of those three, the one that most appealed to me was LinkedIn, because as I like to say, I was already married, so Friendster was not exactly my thing. And I don’t belong to a motorcycle gang or practice polyamory, so Tribe was not necessarily my thing. And so as a result, LinkedIn was really the thing that made sense to me, and I was one of these people who had obsessively recorded information about my contacts in Microsoft Outlook and things like that, and so LinkedIn was a natural for me. I signed up for the product, and as it turns out, I’m roughly the 2,000th person to have signed up for the product in its existence. I thought it was great, and at that point, I began reaching out to the founders, because I saw they were also fellow Stanford alumni. I was able to reach out, at the time, Stanford had its own alumni social networking service, just for Stanford alumni. I began talking with Reid and his co-founders. t was at that time I told them I was really enthusiastic about what they’re doing, and I, in fact, had read, come and speak for the Harvard Business School Alumni Association, to talk about why they should sign up for LinkedIn, because if you can believe it, this was a period of time when Harvard Business School alumni didn’t realize they need to be on LinkedIn. And we’ve been in touch ever since. Later on, after a number of years passed, and LinkedIn went public, and all these different things, then in the year 2011 or so, Reid, and our other friend Ben Casnocha came to me and said, hey, we’re interested in getting your help on things that we’re writing, and would you be interested? I’d known them for a long time, and I said, well, I have one specific question to ask, which is, does my name appear on the cover of whatever we produce? They said, yes, of course. I said, done, acepted. Sign me up. That’s when we began working closely on the books, and of course, the first one was “The Alliance,” which came out in 2014. And then “Blitzscaling” came out in 2018. Ben Casnocha and Reid and I wrote “The Alliance” together. and then Reid and I wrote “Blitzscaling” together, because Ben wanted to focus on another project, which is a fascinating one called Village Global, which is a networked venture capital firm that he and Reid created.
Mark Bidwell 5:03
Okay. So let’s get into “Blitzscaling,” the book. The definition I like was a description by a CEO, who described being blitzscaled is like harpooning a whale, but you’ve got a better definition, or a more accurate description of what blitzscaling means.
Chris Yeh 5:20
So the technical definition of blitzscaling is prioritizing speed over efficiency in an environment of uncertainty. If we reduce it down to a single sentence, that’s where it is. Now the big question when you hear that is, okay, speed over efficiency in an environment of uncertainty, that sounds kind of risky, that sounds kind of uncomfortable. Why would we do this? And the answer is, you would do it if you are facing a winner take most market that’s really valuable. Because if you have a winner take most market that could be worth billions, even trillions of dollars, then your objective should be to win that market. Because once you win that market, you become an enduring market leader, and you can print money for decades. That’s the dynamic we see playing out with companies as diverse as PayPal, and LinkedIn, and Facebook, and so on.
Mark Bidwell 6:11
So it becomes a vehicle for enabling a land grab, essentially.
Chris Yeh 6:16
Yes. In fact, there are two dynamics that cause the land grab. One is a direct land grab, where as you gain customers, or users or resources, you actually lay a claim to them that nobody can ever take away from you. In the book, we talked, for example, about the oil, shale and gas boom, in the United States in the 2000s, where literally, it was a land grab, because what you do is you lease the mineral rights from the landowners, the farmers and ranchers, and you sign a 99 year lease. Once you’ve signed that lease with the rancher for that territory, you own that territory, and you have literally grabbed the land. The company that benefited the most in those days, Chesapeake Energy, specialized in leasing mineral rights. They had land man that would go out and get those mineral rights. So it was the literal land grab. But the other thing that may cause this is what we call a network effect, where if you have more users or customers, the value of the entire network increases for each individual user or customer. And then has the effect of creating a land grab, because what happens is, your product or service becomes so valuable to the individual user, that even if somebody came in and clone it exactly, and offered it for free, you wouldn’t lose customers, because they cannot compete with the network value that you have.
Mark Bidwell 7:35
And we’ll come back to that in a minute, because I think you described five different types of network effects in the book. But before we go there, the second piece to this is an environment of uncertainty in the definition. It’s strange to say, it’s particularly uncertain, it felt uncertain for many years. How do you characterize that environment of uncertainty? Are these markets that are hyper competitive? Are there markets that don’t exist today? What do you think about this uncertainty?
Chris Yeh 8:02
All of the above. And the way to think about it is simple, which is, let’s say you’re running a race with your competitors. It is a winner take all race, where there is a prize of a billion dollars for first place, and a prize of nothing for second or third. It’s the Ricky Bobby principle, if you ain’t first, you’re last. Now, if you’re running that race, then obviously, one of the things that you would love to do, besides being a faster runner, is to start before everyone else. That’s the way you run a sprint, if you’re allowed to start a couple of seconds before everyone else, you’re probably going to win. But the risk and the uncertainty is, is the starting gun actually going to go off? Is the market actually developed? That’s where the uncertainty comes in. So when we say prioritize speed over efficiency and environmental uncertainty, the willingness to tolerate uncertainty and risk is what allows you to get a jump on your rivals, on your competitors. But there is a risk associated with that. You might jump, and it might be that that’s not actually a valuable race. Or you might jump and discover that you actually went too early. A fascinating story is that LinkedIn is not Reid’s first social network. Reid first tried to create a social network during the dot-com boom in the late 1990s. He created a company called SocialNet, which, incidentally, I was one of the few people who ever signed up for. But it was a social network, right? It was a general purpose social network, not just professionally focused, it was focused on social recreation, and all these different things, and it ultimately failed. Part of it was perhaps, it wasn’t as tightly focused as it needed to be, but part of it was, it was just a different world. 1998 is a very different world from 2003 in terms of internet penetration, broadband penetration, people’s willingness to have their identity online, etc, etc. In the case of SocialNet, Reid went ahead and jumped into the uncertainty, and it didn’t pay off, but he was fortunately able to come back, jump into the uncertainty with LinkedIn, and it did absolutely pay off.
Mark Bidwell 10:04
You talked about some of the companies that it’s best suited for companies or for markets, which are winner take all or winner take most markets. What other characteristics of the market opportunity would you say makes blitzscaling particularly relevant?
Chris Yeh 10:19
Well, of course, we’re looking for a large market, generally a global market, because there is so much risk involved, you really want the prize to be absolutely enormous, and for that you need a giant market. If you were to blitzscale a small market, that’s great. You dominate that market. But would it ever justify the investment that you put in? The other thing is, there are certain patterns that we look for, certain types of business models that just seem to work really well. A social network, for example, is enormously blitzscalable, it has strong network effects to drive the winner take most market, tends to have strong virality to drive the distribution and growth, and it tends to really be extremely scalable from an organizational and operational perspective. A business model, like a social network, or a two-sided marketplace, these are businesses that just tend to do better. But that being said, there is no reason why a company with a very different business model can not blitzscale. There are companies that have physical products that blitzscale, and there are even companies in old stodgy industries that blitzscale. The most important thing is just, is there a valuable winner take most market? And can you move faster than your competitors?
Mark Bidwell 11:31
Yeah, yeah. So maybe we can then get into some details. You put together a very helpful canvas, which I suppose is loosely borrowed from the business model canvas, talking about the four key growth factors, and the two key growth limiters. We’ve touched on some of these already, but can we think of an example, I don’t know one that’s in the public domain that you’re familiar with, which you could describe, and just take us through each of these? I know that you have your podcast, where you do this for recently funded companies. But perhaps we can take a more established company that people are familiar with, and just take us through some of these different components of it?
Chris Yeh 12:05
Absolutely. Let’s just go through them in turn, and I’ll provide a well known example for each. The first is that winner take most market. We talked before about the importance of network effects. The examples of network effects I give are eBay and Craigslist. Now, eBay and Craigslist, they’re both two sided marketplaces, and they have strong network effects that make them strongly winner take most or winner take all. If you think about it, eBay is a product that’s been around since the late 1990s. It has done very little product innovation, if you look at it, it looks almost the same, a little bit different, as I like to say they did add “buy it now.” That was a big innovation, but that was in the 1990s. And yet the company remains enormously valuable and a dominant player in e-commerce. Conversely, if you take a look at Craigslist, as I like to put it, Craigslist hasn’t even changed its graphics, because it doesn’t have any, the product is exactly the same as it was in 1996. And yet, it still generates a billion dollars a year in free cash flow, which flows almost directly into Craig Newmark’s pocket.
Mark Bidwell 13:09
Does it really? How extraordinary. So he got there because, we’ll probably come into it as we’re getting into distribution and margins, and network effects. Sorry, keep going. Those are two live examples of the network effect.
Chris Yeh 13:21
Yeah, exactly. Well, those are examples of the compelling network effect, which drives the ability to ultimately be a long-term winner. Because if you’re Craigslist, you have not changed in 25 years, and you’re still dominating, and generating a billion dollars a year in free cash flow, which is amazing. What I like to tell audiences is, it means that you could, if you are truly in a winner take most market, take the next two and a half decades off, not doing any innovation and still be dominant. Not saying you should, but it would be nice to have that option. Now, the next thing is the power of distribution, because of course distribution is what allows you to get to that critical scale. And with distribution, it’s things like virality, and it’s things like tapping into existing networks. And those two actually work very closely together. So if you think about it, the success of PayPal really boils down to the combination of those two factors. PayPal is inherently viral, because if you use PayPal to send someone money, and they need to open up a PayPal account to receive that money, they’re probably going to do that. But PayPal also experimented with not just the organic virality, but the incentivized virality. So if you remember, during the early days of PayPal, if you got your friend to sign up for PayPal, you would get $10, and your friend would get $10. So that’s an incentive right there that encourages a lot of people to go out there and try to sign up their friends. As Reid put it, people thought we were crazy. But actually, if you think about the cost to acquire a customer in the financial services industry, $20 is nothing. It’s incredibly cheap,
Mark Bidwell 14:59
But what would you think the lifetime value of a PayPal customer would be?
Chris Yeh 15:03
Well, if you think about the kinds of customers that we are, like you, how much money, let’s say, do you spend on eBay over the course of a year? It depends on who you are. My wife happens to do a lot of shopping on eBay, so my guess is that we spend easily, let’s call it $2,000 a year on eBay. And if we start thinking about it, those eBay sellers who are collecting the money via PayPal are paying something like 2% or 3% of that money. So $2,000 times 3% is $60 a year. And that’s been going on now, because of the network effect, for 20 plus years. So it’s really $1200 in lifetime value, and continues to rise, and that’s just on the PayPal side. Because remember, eBay eventually bought PayPal. The value is in eBay, because its take rate is even greater.
Mark Bidwell 15:51
Extraordinary. Okay, so that’s distribution.
Chris Yeh 15:54
Yes. So that’s the distribution. And I was going to mention the other thing, of course, with distribution, is being able to tap into an existing distribution network. And for PayPal, that turned out to be eBay sellers, because they had this community of people who were very interested in accepting payments, they helped spread PayPal as well, and in addition to all the individuals who were just trying to get the incentive, or sending payments. So, network effects and winner take most, and there was also distribution. Now there are a couple of other important ones. Market size is a pretty important one. But the nuance here is that it is the future market size, not the current market size. The example I always give here is Uber. In 2011, a very famous professor at NYU, Aswath Damodaran, wrote a piece that calculated Uber could never be worth more than a billion dollars, because the global taxi market is 100 billion, and if they were able to capture 10% of the global taxi market, and they had a reasonable take rate, the discounted cash flow analysis says that Uber would be worth about a billion dollars. But that analysis is wrong, and that’s because the market for Uber is much bigger than the market for the global taxi business. And in fact, Uber had surpassed 10% of the global taxi business by the year 2017. It’s because all of a sudden, the product itself enlarges the market. We use Uber and Lyft and things like that in ways we never would have used a taxi. And so, if you really want to make sure that you’re going after a big enough market, you have to project out into the future, and understand where the market is going to be.
Mark Bidwell 17:20
I think about this in terms of, what’s the surface area of the business? As you’re looking at a time, you can project forward and say it’s gonna, as Aswath Damodaran suggested, but that doesn’t get you very far, well, it didn’t get him very far, because you’re just extrapolating from the present situation. Switching gears as an author versus an investor, what do you think about markets that don’t yet exist? I was reading the bio, or the business book by the founder of Twilio. He’s talking about the use cases that have expanded exponentially with this technology, the vast majority of which they couldn’t even conceive of when they founded the company. Then you could make the same case about Amazon as well. There are lots of these companies that just expand there, because of the surface area of the business. How do you think about this, Chris?
Chris Yeh 18:09
So for me, the technique I always use, the general technique, is to look at the individual user. I think this is something that Jeff Bezos has done successfully at Amazon to expand that company over and over again, which is to look at individual user behavior. When you’re considering the market for Uber, for example, it’s very easy to take a top down approach and say, oh, this is the equivalent of taxis. But then if you take a bottom up approach and say, well, what are some of the things that I would do if I had the ability to call a car that takes me somewhere? Well, if I were going out, and I were going to be at a party or something like that, I would probably want to do this, and maybe I would go to more parties as a result. Or alternately, one of the things that you and I may have done, because we’re mature, so to speak, is you can probably recall a time when you would drive your car to an airport parking lot, or an off airport parking lot, and park your car and then take a bus to the airport, because it was so expensive to go ahead and call a taxi, it was enormously expensive, that it was worth it to us to drive our car, park it at a lot, leave it there for a week and pick it up again. Well, that simply doesn’t happen anymore, because again, things like Uber and Lyft have completely superseded it. You start thinking about the individual, and the use cases, and the way those expand the market. And pretty soon you get some comfort with the notion, this is going to be bigger than just the top down projection would indicate.
Mark Bidwell 19:34
Interesting. I’m a former anthropologist, actually, Chris. As you talk, it reminded me of why anthropologists are in such demand in some of these companies, because they actually look at how an individual interacts with a product on the ground. It’s blindingly obvious, but very few people do it of course. Is that how you think about market size in large markets?
Chris Yeh 19:57
Yes. So a few of the other things that we talked about, product market fit. So product market fit is very famous, it’s a concept that was both developed by Marc Andreessen, a very famous entrepreneur who created Netscape, and later became a venture capitalist, and has really been promoted by Steve Blank, who is a professor at Stanford, and also a former entrepreneur ,created a company called Epiphany, and, of course, my friend Eric Ries, who wrote a book called “The Lean Startup,” which almost everyone has read. And all of them talk about the importance of product market fit. Now, the thing that we say about product market fit and blitzscaling is it’s necessary but insufficient. It’s necessary, because without product market fit, you can’t have sustainable success, but insufficient, because other things like the winner take most market, and like the distribution, are ultimately more important. But let’s give you an example of a company, where it was brought down by a lack of product market fit. So if we think about Groupon, at one point, Groupon was the fastest growing company in history based on revenues, and it has all these things that make it really appealing. It has this incredible set of network effects, because the more buyers you have, the more merchants are interested in the platform. The more merchants you have, the more the buyers are interested in the platform. This incredible distribution through virality, as people say, well, I have this group buying thing, I’m going to spread it to my friends, so I can get a better deal as well. It has high gross margins, and things like that, because what you’re doing is you’re giving away someone else’s discount, and charging money for it, that’s incredible. The market size is enormous, it could be anyone, but the key issue is the product market fit isn’t there. It’s a miserable experience for the buyer. And it’s even worse for the seller, because the only buyers that it attracts are the cheapskates who will never come back unless there’s a coupon. So despite this incredible growth, and the company turned down, by the way, an acquisition offer from Google, this was many, many Google splits ago, and Google offered something like $5 billion in Google stock, which would probably be, oh, I don’t know, $300 billion today, but they turned it down, they went public, and the company is sort of struggling to still exist. It really doesn’t have a reason to exist, because again, there is no product market fit.
Mark Bidwell 22:05
Interesting. But you’re saying it’s insufficient in the world of blitzscaling, to have a product market fit.
Chris Yeh 22:10
Correct. You can have product market fit, you can have a great product, but if it does not have the characteristics of it being a winner take most market, and you having distribution, it’s not going to work. A company like WeWork, for example, has product market fit, at least relative to its competitors. If you’ve ever been to a WeWork, and you’ve ever been to its predecessors like the Regis office complexes, that used to exist, still do, by the way, it’s a much better product. Regus offices are faintly depressing, to put it bluntly, yep. And WeWork is much nicer, they have great product market fit. The only problem is the economics doesn’t work at all, and there’s no winner take most, or network effect, or land grab element to it.
Mark Bidwell 22:52
Interesting, interesting. And then I think you had another limiter around operational scalability, which I think is probably going up from WeWork, there was no operational scalability there either, I guess, was it?
Chris Yeh 23:03
Correct. It was certainly a challenge there, because at the end of the day, there’s not a lot of additional economies of scale you can get from operating a series of offices, and they had greater operational costs than their competitors. The things that made it such a great product also made it economically disastrous. Another great example, I talked about my friend, Jonathan Abrams and Friendster before. Friendster was an early leader in the field of social networks, and social networks are often winner take most. So why did Friendster fail? Well, it’s because they made some bad technology choices, and as the product got more and more popular, the pages took longer and longer to load, until eventually it peaked at around one minute per web page. Now, have you ever sat on a web page for a minute waiting for it to load? You probably don’t even sit on one for three seconds anymore. This is what they were asking people to do, and it eventually just killed the growth of the company.
Mark Bidwell 23:52
Fascinating. So this feels like an analysis that one could do in a darkened room. But let’s touch on the human element, because I think you mentioned it, we were touching on the WeWork thing as well, which there’s quite a significant human element there. But if I’m the CEO of a startup, listening to this podcast, or to your podcast, or having picked up the book, and I can go through and say, yeah, I’ve got a big target market, I got distribution, I got all these, check check check. And yet, as you say, there’s a huge amount of risk here. There’s a risk that you might go too quickly, you might go too early, there’s a risk that you’ve got to work with a different type of investor, I would imagine, because you can’t bankroll your business, I guess, this can’t be bootstrapped, because the funding requirements are pretty phenomenal, right?
Chris Yeh 24:39
It’s very difficult. It is theoretically possible in certain cases, but we can’t really point to many examples. Craigslist is a bootstrap business, and partially the reason it was able to happen is it was so early in the process of the internet, that Craig was able to get this early lead, and he just never relinquished it. But all these other companies, whether you’re looking at Facebook or Google or Amazon, all of them have raised significant amounts of money. People sometimes say, well, Google didn’t raise that much money. I’m like they raised $25 million as their first round of funding. That counts.
Mark Bidwell 25:13
Yeah, yeah. But even if they can do that, I guess it makes it almost like a zero sum game for the CEO. Right?
Chris Yeh 25:20
That’s right. And again, the thing that you should be looking for, as the CEO, is to ask yourself, okay, do I have this tremendous winner take most market opportunity in front of me? If that’s the case, it doesn’t really matter how efficient I am along the way, what matters is whether I win or not.
Mark Bidwell 25:36
Yeah, yeah. So maybe let’s go there. Because I think there are some counterintuitive rules, if you like, around, as they go on the journey, I put it under the section of the kind of mistakes that people make when people blitzscaling. You say things like, don’t tolerate bad management, or don’t let the fires burn. These are all very, very counterintuitive, and for those, because quite a lot of my audience are probably sitting in large organizations, which are very, very successful, having developed world class processes, and they reduced uncertainty to as little as possible, and they’ve got a track record of success, but that doesn’t work in this environment. It’s almost exactly the opposite, isn’t it?
Chris Yeh 26:13
That’s right. And obviously Reid and I deliberately wrote our list of counterintuitive rules to be as viral as possible, because they just sound completely insane, but they absolutely do make sense in this context, because the context of prioritizing speed over efficiency is just so different from what is typical. If there weren’t already a book entitled “What They Don’t Teach you at Harvard Business School,” that might have been a great subtitle for what we were writing. So you mentioned a couple of them, so one of them, for example, is tolerant of bad management. And of course, this is something that no one would ever think is a good thing. Now we do say, we’re saying tolerate bad manage, we’re not saying tolerate criminal management, and what we mean by bad management is, there are a lot of different processes, and practices that make sense for a large, established, stable company, that don’t make sense for a small company. Let me give you a couple of examples. In small companies, you don’t have this careful notion of salary banding, and this is an A6 or a G7, and these titles are all carefully controlled. Instead, you have people roaming around with titles like Grand Vizier, or Master of the Coin, or what have you. And some people may be paid very differently. Now, these are all problems, but they’re problems that are acceptable in the early days, in order to move faster. If you take the time to build a careful set of salary bands, and do annual reviews and 360 reviews and all these different things, you might not ship your product before your competitor. So the objective is to go as quickly as possible, and again, after the company has grown, there is the opportunity to do this. Rest assured that companies like Google and Facebook have very carefully organized salary bands at this point in time, but they didn’t have them early on.
Mark Bidwell 27:56
Okay. There was another one, which I thought was quite interesting, particularly the current environment, of don’t raising too much money. There are two schools of thought here. One is that, if you’re awash with money, you just blow it, and that lack of money is a constraint, which actually can drive you in a direction, but that’s totally at odds with what you’re proposing, or what this methodology proposes.
Chris Yeh 28:19
Yes. So obviously, there are risks to raising a lot of money, and those risks are that people will just waste it, which I certainly can sympathize with. I remember when I was an entrepreneur, I would ask myself, are my employees just trying to come up with more ways to blow the money I’ve so heartbreakingly raised? It’s insane, there was one fellow who worked for me, who shall remain nameless, because I still know him, but he said, as I was outlining something we need to do, why are we going to go through all that effort just to save $25,000 a month? And I said, listen, Jim, do I pay you $25,000 a month? I don’t know about you, that strikes me as real money. But even though that is a danger, there is much greater upside to raising money, and the reasons are as follows. First of all, money lets you move faster, and that is a key fact. You can go ahead and recover from problems, so if something goes wrong, having a safety margin of money, having a cushion allows you to try something new. And when you do find that phenomenal opportunity, it allows you to really go after it, instead of having to take three to six months to raise more money. So the reason to raise the money is not to spend it, the reason to raise the money is to give you that ability to adapt, and then ultimately to really move faster when the time comes, without having to take the time to raise that money first.
Mark Bidwell 29:39
Yeah, yeah. So I’m on the board of a company, I’ve been on the board of a couple of other companies, which raise money. I’m just interested in, I know that you’re an investor as well, and touting these kinds of companies is, presumably, a very different board dynamic from a more traditional startup. Can you give us a sense of some of the board discussions? I guess you need complete alignment at the level of the board, because this could tear the organization apart if there isn’t that alignment, right?
Chris Yeh 30:06
Yes. And startup boards are something that Reid and I have talked about pretty extensively. We have a series of podcasts that are put out by his venture capital firm Grey Matter, where we in fact, talked about startup boards. It is absolutely true. To pull off a blitzscaling strategy, you really want to have your board on board, and that’s because you’re making these investments in the future, and they are board level, capital type decisions, not just operating decisions. If you have to operate on a quarter by quarter basis, and people are saying, well, why are we investing money? Aren’t we going to see a payback in a single quarter? Oftentimes, in blitzscaling, that’s not the case. You have to invest heavily in order to make things work, and so the board has to be on board. I do see it play out in many different ways. I have entrepreneurs that I work with, where they say, can you help me persuade the board that we need to be more aggressive? And then there are other cases, where the board is coming to me and saying, can you come on board and help persuade the entrepreneur and the employees to be more aggressive? So it can work either way, but it is really important with blitzscaling to get everyone on board, from CEO to executive team, to frontline employees, to the board, to understand that this is the strategy we’re following.
Mark Bidwell 31:18
Coming back to the original definition like harpooning a whale, it’s a certain type of CEO that would be up for that journey, right? Do you have any filters that you use when you’re looking at a blitzscaling CEO candidate? You’ve been around the block a few times, would you ever blitzscale, for instance, with a first time CEO, for example? I’m just wondering if you have any fast track heuristics that you use, to get to the heart of this particular area?
Chris Yeh 31:46
Absolutely. So this is something that happens so often in the venture world. Venture capitalists like to say that they’re good pattern matchers, as if that was a good thing. Pattern matching means that you are essentially operating a cargo cult, where you see the signifiers and you mistake them for meaning. It doesn’t make any sense, you need to actually dig underneath and figure out why. So we absolutely do back first time founders, and the question is, why do we back first time founders? What makes them capable of doing this, when many other first time founders are not? This is not the very shallow approach that some people have taken very famously. Paul Graham, at one point said, I just love these guys who look like Mark Zuckerberg, and they’re nerdy, and they wear their hoodies. Those are the wrong signifiers. What we’re really looking for is someone who’s good at learning, and learning from experience, and learning from others. The reason is that usually, when you’re trying to blitzscale, the reason there’s a market opportunity is because it’s new. It’s not because this is a well established market, and nothing has changed, and all of a sudden, you’re going to come in and take it away from everyone who’s an incumbent. That just doesn’t work, there has to be something new, or something very different, the market is either being made or remade. That means that you’re into territory which has not been trodden before. So you have to be the kind of person who can learn very quickly what the new rules of the game are. We describe it as if you were playing a set of board games, and every three months, you throw out the previous game, and bring in a new game, except that they don’t announce when that new game is being brought in, and they don’t give you the rulebook. You have to be someone who’s very attuned to what’s going on, can recognize that the game has changed, can learn the new rules, and can then implement those rules. Sometimes we use them as a proxy, oh, they’ve been successful before. Okay, that’s true, they were successful before, maybe they were successful because they learned, or maybe they were successful because they were lucky. How do we know? It is much more important to really dig into, okay, how does this person learn? If you go to someone and you say, well, what do you learn from this experience, and they can’t explain it, that’s probably not a good sign. You want somebody who can very clearly articulate what they learned, because if they can articulate what they learned, then they could articulate it for other people, and their learning can spread throughout the organization, instead of being restricted to them.
Mark Bidwell 34:01
Lovely. Yowards the end of the book, you talk about how do you future proof yourself as an employee. I think one of the things that you referred to is being an infinite learner. Interesting, fascinating. So maybe we just switch gears to, as I mentioned, some of my listeners are likely sitting in in large corporations. Bill Gates, his quote here, I’ll just read it out, I think it’s in the introduction, in the forward. “Ideas behind blitzscaling aren’t just for startups and scale ups. They’re important for big established companies too.” Now Microsoft is I think 35 years old, and it’s still growing today, so they’re doing something right. But what examples can you share of large, mature established companies that have actually embraced this, beyond just top down, this looks interesting to create a little bit of momentum, and have really got this into that DNA? Can you think of any?
Chris Yeh 34:54
Absolutely So the example I love to use, I love to describe to audiences, imagine a company that has 17,000 employees, that has billions and billions in revenue, that has a market cap of $20 billion. It’s a pretty big established company. How much more growth could there be, right? Probably not a lot. And then I reveal that the company I’m talking about is Amazon in 2006, right, when they launched Amazon Web Services. It is amazing, you can actually go back, and there was a Businessweek cover story on Amazon Web Services, with this photo of Jeff Bezos, who still had a little hair at that point and was much skinnier. But this photograph of Jeff Bezos, and it says, Jeff Bezos wants to run your computing infrastructure, Wall Street wishes he just mined the store. It’s astonishing, right? Because if you had said, you know what, Amazon’s worth $20 billion, I don’t think there’s much more growth left. I don’t think we can invest any money in this company. Think about what you just missed out on. And of course, Amazon is very famous as an innovator, but this applies to large established companies as well, for the following reason. When people look at a large established company, a lot of times people from the outside, especially the startup world, but even people who are at these companies, make the mistake of looking at them as monolithic. They think to themselves, here’s this business, it’s boring, it’s growing 5% a year. And my response is, that’s almost certainly not the case. What’s almost certainly the case is you have a portfolio of businesses that are churning away. Some of them are growing 30% or 40% a year from a small base. There will be some large ones that are gradually declining over time. And what you need to do is, you need to figure out how can I blitzscale the most promising elements? What this allows you to do is to ride what’s called the S-curve of innovation, where each new innovation reaches this S-curve portion where it’s going almost straight up. What’s allowed a company like Apple or Microsoft to be so successful over time is riding multiple S-curves. Apple, most famously in personal computers, and then the Mac, and then the iPod, and then the iPad, and the iPhone, most of all, and now cloud services, iTunes, and so on and so forth. You can see each of these started off as a new project within the company, and then was built up, and eventually became something that was dominant, but eventually maybe became not as important. The Mac was the reason why people really bought into Apple in the 1980s, but the Mac today is maybe 10% of Apple’s revenues. It’s a huge business, but Apple wouldn’t be Apple if it hadn’t developed the iPhone, and so on and so forth. Even established companies, I’ve done some work with some pretty established companies, where they recognize their core business is shrinking, but they have promising businesses buried inside the entity, which they know they need to blitzscale and build in something even greater, and take advantage of things like the winner take most market, and network effects, and virality, and things that maybe they didn’t think about before, but can now be used to power these new businesses.
Mark Bidwell 38:00
Interesting. Yeah, I’ve noticed you’re talking about that, it’s the classic BCG analysis, right, where you have your cash, cows and your stars, and so doubling down on the stars with this methodology, that makes a lot of sense.
Chris Yeh 38:14
And the question marks, frankly, to figure out if the question marks are stars or not.
Mark Bidwell 38:18
Yes, yes. Great. So this is a fascinating methodology, clearly getting enormous traction, and not just in Silicon Valley, I guess. I think you make the point in the book that a lot of Chinese companies, they almost adopt this methodology without knowing they’re doing it, it just seems to be in their DNA to move so quickly.
Chris Yeh 38:38
Absolutely. The Chinese companies are absolutely enormous. I’m seeing a lot of companies in Latin America as well, growing incredibly fast. It’s been fascinating. Now that I’m an investor, I’m looking all over the world, and I’m seeing people rising up everywhere. What’s amazing is, I’ll talk with the CEO, and I spoke with one yesterday of a company in Brazil that’s growing 100% a month. It’s absolutely insane how quickly it’s growing. And he said, I read your book last year, it’s our Bible, we use it all the time. I’m so excited to be talking with you about blitzscaling. And this is somebody in Brazil, the 1000s and 1000s of miles away, and yet they’re able to take these ideas in, and they’re growing their company at an incredible rate. I’m hopefully going to get the privilege to invest in them.
Mark Bidwell 39:25
Wonderful. Are there any parts of the world where this just doesn’t land, because, the reality is that the internet is global, these drivers, these forces are ubiquitous, right, they’re not boarded in any way.
Chris Yeh 39:38
They’re fairly ubiquitous. The one word of warning that I would issue to people is that, if we look at the Internet, and we look how it’s split up, you need to think globally for the most part. There are a few lucky countries, like the United States, like China, and possibly India, that can think just nationally, because those markets are so huge. And by the way, India, the kind of growth there is astonishing. I’m an advisor for a friend’s venture fund entity, and it’s amazing how quickly these companies can grow. So you can have an English, an American internet, you can have a Chinese language internet, you can have a Hindi internet, and these are all things that are probably large enough to exist on their own. But other than that, you have to tap into something global, and usually, that’s the English language internet. If you are in France, can you build enough of the business purely on the French internet to compete? Or Russia, for example, which is really focused on building up its own national champions? Well, guess what, you can build VKontakte, which is the Facebook of Russia, but VKontakte is a tiny, tiny fraction of the size of Facebook. Every year Facebook is going to outspend it on r&d 100:1, and how is it ever going to be able to keep up, when the resources are so much greater for a company that’s open, and taking advantage of a global market instead of a local market? I think that the main danger for entrepreneurs is getting caught up in a local market that is not large enough to give them a stable position within the overall global economy.
Mark Bidwell 41:05
Yeah, it’s interesting, because in the start of your book, you talk about the Airbnb strategic question, because they are under attack from Rocket Internet, a clone of theirs. As I was reading it, I couldn’t quite believe it, because you know, you can’t imagine Airbnb being under attack. But obviously, back in the day, those guys in Berlin, I guess, moved very, very quickly and built something that was going to threaten that franchise straightaway, wasn’t it?
Chris Yeh 41:29
That’s right. So it’s a fascinating story, everyone knows Airbnb is this monster business now globally dominant, worth something like $80 or $90 billion. But back then it was a small startup, it had less than 40 employees, and the Rocket Internet co-folks, that’s the Samwer brothers out of Germany, created a clone of Airbnb in Europe called Wimdu. And they funded it with $100 million and staffed with 400 people and then went to Airbnb and said…
Mark Bidwell 41:55
In three months or something, right?
Chris Yeh 41:56
In three months! It is, if you will, blitzscaling. They went to Airbnb and said, okay, either we’re going to bury you, or we’re going to merge, and if we merge, we want 25% of your company. Ultimately, Airbnb made a decision, no, we’re going to compete with them head to head, we’re going to raise more money, we need to build our own network in Europe, because again, being a travel company, you really need to be global. And it ultimately accelerated the development of Airbnb. Now, the reason Airbnb won out over Wimdu is, again, you can’t just read a couple of headlines, and then replicate a business, or even just look at a website and replicate a business. There’s so much involved in getting it all right. What Paul Graham of Y Combinator told Brian Chesky of Airbnb to do is, listen, the way you’re going to get your revenge is by forcing them to operate a business they don’t actually want to run. And that’s precisely what happened. And Wimdu actually went out of business in 2019.
Mark Bidwell 42:47
Fascinating. So we talked about this being a choice that you can either make or not make, but in that example, it was a life or death choice.
Chris Yeh 42:56
Correct. The choice comes if you do not have competition, but if you have competitors who are trying to blitzscale, it doesn’t matter how well you’ve done. If they reach critical mass, and they become the dominant market player, it’s just game over for you. You might possibly be able to hang around long enough to recover, if the technology stack changes enough. We’ve seen, for example, AMD be able to carve out a space in what was previously an Intel dominated world. But really, in most cases, that’s the exception, not the rule.
Mark Bidwell 43:25
Yeah. And we hear a lot, or I hear a lot, I don’t have any competition. But that probably means I don’t know of any competition, and by the way, that could be true at a point in time, but by the end of the week, it might no longer be true. It’s unlikely that there are many companies out there with no competition.
Chris Yeh 43:40
If nothing else, Rocket Internet is always just waiting around the corner.
Mark Bidwell 43:43
Or a Brazilian entrepreneur from somewhere else. That’s an interesting business, just cloning these startups as well, of course.
Chris Yeh 43:49
Absolutely.
Mark Bidwell 43:50
Wonderful. Chris, I’ve really enjoyed the book, very much enjoyed talking to you. Before we go, we talked before we came online about three questions which I’ve given you the best part of an hour to prepare for, so my apologies. First question, and this comes from Charlie Munger, where he says, a year in which you haven’t changed your mind is a wasted year. So my question to you is, what have you changed your mind about recently?
Chris Yeh 44:13
So one of the things that we’ve been doing for my firm Blitzscaling Ventures is we’ve been building out a network of fellows around the world to look at different markets. The thing I’ve changed my mind about is just how much more advanced these markets are, and how much further along the blitzscaling curve they are. When we wrote the book, we wrote about China as the land of blitzscaling, we said there was a lot of promise in other places. Now I look out over the landscape, and I’m looking at companies in Southeast Asia, I’m looking at companies in Latin America. The level of growth that we’re seeing is just stunning and staggering. I think that it’s a great thing that blitzscaling is even more prominent, and more widespread than it had ever been. It’s what we always dreamed of when we wrote the book, and we’re very happy that it’s happening.
Mark Bidwell 44:56
Super, super. Second question, where do you go to get fresh perspectives, particularly when you’re faced with a challenging situation?
Chris Yeh 45:05
I mentioned one thing, which is to go ahead, and make sure that you really go down to the level of the individual user. I always feel like with everything, one of the great meta strategies is to get down to the really concrete level, where people are making individual decisions, and learn from the micro rather than be focused on the macro. But the other thing that I recommend to people all the time is to make sure that you’re also learning from other industries, other professions, other people who are really good at what they do, but they do something different. What I do when I listen to podcasts, for example, is I will listen to podcasts from very different worlds. I’ll listen to podcasts on sports, I’ll listen to podcasts on science, I’ll listen to the New York Times Book Review, I’ll listen to podcasts on politics. What I’m looking for are ideas that maybe people aren’t talking about in my industry of technology startups, but could potentially be applicable, because most great ideas do not come from nowhere. They’re not sui generis, they’re just ideas that sprang up somewhere else, and became enormously useful in a new context. So look outside your standard context, look for things that you’re interested in, try to learn things that are coming from different places in different professions.
Mark Bidwell 46:16
Lovely, lovely. And then the third and final question, what’s been your biggest failure or low, and what did you learn from that?
Chris Yeh 46:25
My biggest failure probably came from my very first company. I started this company when I was in business school, and it was called Target First, and I was able to raise money in 1999, because that was a period in time when you could be in business school, and still raise millions of dollars to run a company. I remember the unbelievable arrogance that I and my co-founders had. My co-founder was saying, well, you know, as long as we make over $100 million out of this, you have to commit to actually buying a Ferrari, because I have a notoriously tight fisted, and I don’t like buying fancy things or anything like that. And he was just like, oh, you know, if we get over $100 million out of this, then you have to buy a Ferrari. That’s the kind of stuff we were talking about. And then of course, the dot-com crash happened, and we were advertising based, and our revenues plummeted 95%. One month, we’re talking about, hey, let’s go public, and the next month after that, we’re like, what on earth, the business just disappeared. So it was a humbling experience, and it reminded me that first of all, I got caught up in this sort of high level stuff of this entire industry, and the rising tide is raising all boats and all these things, instead of focusing on the individual level of the user or consumer. And the other was just saying, listen, circumstances could change on a dime, as we’ve all learned during the course of this pandemic. What you need to do is to be one of those infinite learners, who’s able to recognize that the rules have changed, figure out what the new rules are as quickly as possible, and then begin playing to win based on those new rules. And that was a really valuable lesson that I learned, and unfortunately, did cost my investors something like $6 million, and cost me some of my own money, but it is a lesson I’ve applied many times since then.
Mark Bidwell 48:13
Lovely, lovely. Well, these darkest moments are often full of wisdom, if like your CEOs, you’re willing and able to learn from those experiences.
Chris Yeh 48:23
Absolutely. And that’s the thing, the bad things are going to happen no matter what. The question is, are you going to be resilient and learn from them, and bounce back from them or not?
Mark Bidwell 48:31
Yep, yep. So Chris, the book is Blitzscaling. It’s easy to find. Where can people find out more about you, and your work, and some more content relating to this if they choose not to buy the book, but I’m sure many of them will go out and grab it anyway?
Chris Yeh 48:44
There’s a variety of places where you can find content. For example, if you really love the idea of blitzscaling, we actually have a Blitzscaling Academy, you can go to blitzscalingacademy.com and learn about that, where we have both detailed courses that go further in depth into blitzscaling, as well as community of people who are really excited about blitzscaling and helping each other grow, so that’s a great thing. For those who are entrepreneurs, or people who are looking to invest in venture capital funds, I run Blitzscaling Ventures, and that’s just at blitzscalingvc.com. There we’re trying to invest in the fastest growing companies, most scalable companies in the world. We’re always excited to be talking with folks there. You can listen to my own podcast, the Chris Yeh podcast, just Google it and you’ll find it, it’s on Apple, and Stitcher and all those other places. Reid and I podcast at the Grey Matter Podcast for Greylock Partners, and that’s just Grey Matter, and you can look for Greylock at greylockvc.com. And then finally, if you are just interested in Chris Yeh in general, there is my own personal website, chrisyeh.com, where you can read about all the different things that I’m doing, and you can get in touch with me if you want me to come on your podcast, or speak for your company or what have you. You can generally find me everywhere else on social media just as Chris Yeh, because I do my best to acquire that name as quickly as possible when they launch.
Mark Bidwell 50:09
Wonderful. A land grab. Excellent. Well, Chris, thank you very much for your time. It’s been fascinating, I’ve enjoyed talking to you. I was in a previous session with you a few weeks ago, which I learned a lot about. Many thanks for your time, and we will put all of that in the show notes, and I’m sure our audience will have enjoyed it as much as I have, so many thanks.
Chris Yeh 50:26
Mark, it is a true pleasure, and I’m happy to come back anytime.
Mark Bidwell 50:29
Wonderful. Thanks very much. Bye.
