The Foundation To Successful Blitzscaling
(Episode 2/5) Greylock Partner Jerry Chen on designing innovative, scalable business models.
The dot-com era saw the failure of numerous startup companies due in part to the strategy of copying and pasting existing business models, created for the offline world, to the Internet. To achieve market dominance and beat out incumbents, companies need to create an innovative business model that is designed to scale alongside your company. Greylock Partner Jerry Chen and entrepreneur Chris Yeh share advice on how to avoid growth limiters, target the right customer and build defensible moats.
This episode of Greymatter is the second in a five-part series on “blitzscaling” where general partners from Greylock discuss their experience building tech companies from startup to scaleup. The themes of these episodes are covered in Chris Yeh and Reid Hoffman’s new book, Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies. You can listen to the other episodes in the series, here. Below are key takeaways and quotes from the discussion.
First focus on solving a single problem well. Design a business model that solves a single problem but agile enough to expand to new markets. For example, in August 2018, Blend announced an expansion into homeowner’s insurance as an addition to their core business of mortgage lending. Blend’s business model was initially designed to take control of the mortgage market and once the company achieved dominance, the business model enabled new products to be added successfully.
Unless you have a single product that costs a billion dollars, you’re never going to get there by one product, one sale. And so, what’s really key is starting out correctly. We talk about a lot of companies inheriting technical debt from day one. You also inherit business model debt from day one. If you don’t start with the right business model, the right pricing, the right go to market- you can’t scale that correctly. That business model debt you inherit will swamp any other success you have. Initially focus on what problem your solving, how you are going to charge for it and how you’re going to sell it. Ultimately, you want business models that work for you, which means the bigger you get, the easier it gets. You’re building some kind of sustainable moat and this moat could be scale, network effects, brand, stickiness and switching costs.
Design your business model to survive growth limiters. As companies begin to scale, they will experience a new set of challenges that will hinder growth. Common limitations, such as team and infrastructure scalability, can and should be controlled early on. Consider approaches that increase your team capacity, including ways to outsource work or even use automation and build these into your business model. More complicated limiters, like full validation of product-market fit, are more difficult to plan for prior to building a company. The best way to manage this is to put the product into hands of real users, seek advice from your personal network, and build your business model to allow for quick iterations.
The external factors, you can’t control. Market, competitors, buyers, those are tougher. So, when you hit a wall, in terms of market size- are there things you can do as a founder, as a company, to change the slope of the demand curve? Actually increase the TAM (total addressable market), increase the market size or do you move to an adjacent market, or move into another product category, then actually continue to blitzscale? Consider adding new curves that are built upon the previous curve, adding parallel curves, side by side or change the slope of the curve. The last one, this TAM expansion, is one that we often don’t see. Now, that’s powerful.
The next generation of enterprise technology products will use different AI techniques to build systems of intelligence. This emerging business model is valuable because it typically crosses multiple data sets and systems of record, making it defensible. To build a profitable and sustainable business, you need strong defensive moats around your company. In the next 5–10 years, companies will take advantage of AI to build intelligent applications to outcompete their incumbents.
One of the business model innovations we’re looking at is, how can you as a start up build a product across multiple platforms, across multiple systems record and build what we call, a system of intelligence or SOI, using AI or ML, that is uniquely advantaged to you as a start up because an incumbent can’t do that. And as you build this application you actually build scale. Because the more you get to congest from multiple platforms, the better you get, the bigger you get.
For enterprise startups, who you sell to is evolving. The industry is seeing an increase in the various types of target customers within enterprise. Significant shifts from selling to strictly IT teams to individuals are creating new markets and business models. For example, Figma created a business model and product that sells direct to designers.
Increasingly, we have this world where centralized IT made every decision and now, every individual is now a practitioner, buyer, decider. I’m excited about finding new decision makers, new buyers, new users inside the enterprise.
In 2016, Reid and Chris stress-tested the ideas of in Blitzscaling by teaching the class CS183C: Technology-enabled Blitzscaling at Stanford University with the help of their friends (and fellow Stanford alumni) Allen Blue and John Lilly. To learn even more about the strategy behind blitzscaling from guests including Airbnb CEO Brian Chesky, Netflix CEO Reed Hastings, Gixo CEO Selina Tobaccowala and many more, you can check out the recordings from the class here.
