Chris Yeh talking about Blitzscaling
In Palo Alto, we meet Chris Yeh who talks about how to blitzscale a company. Blitzscaling is very important for startups.
Martin: Is your Start Up growing too slow? Maybe Blitzscaling can help. Today we talk about this with Chris. Chris, Hi.
Chris: Glad to be here.
Martin: Who are you and what do you do?
Chris: So I’m Chris Yeh and I do a whole variety of things. But for today the most important thing is that I write books. So I Previously co-authored a book called ‘The Alliance’ with my friends Reid Hoffman and Ben Casnocha and that came out last year, 2014 and we are currently working on our next book which is going to be focused on the concept of Blitzscaling which is growing Start Ups extremely rapidly to an extremely large size.
Martin: Besides being an author, what did you do before?
Chris: So I have a classic sort of Silicon Valley background; I studied Engineering, but also Creative Writing when I was an undergraduate at Stanford. I worked in high tech industry since 1995 in various Starts Ups. I actually was actually in Boston for a while working D. E Shaw and Company which is the company just Jeff Bezos worked for before he started Amazon. Sadly, he had left before I arrived so I never got a chance to really work with him. But then, I had been out here in Silicon Valley since 2000, doing a variety of things starting companies, investing, advising, mentoring young entrepreneurs and the likes.
Martin: Cool. Let’s talk about Blitzscaling, can you please elaborate on the concept of Blitzscaling.
Chris: Sure, so the concept Blitzscaling really comes from the notion of there is something special about the kind of speed with which you can grow Start Ups, especially here in Silicon Valley and in certain others parts of the world like China. Everyone knows that companies want to grow, every company believes in growth but for the most companies that kind of growth is, “Hey can we grow 10% a year? Can we go 15% a year? Can we steadily climbed?”. And this is the classic way that a lot of companies have been successful in the past. But we increasingly see companies just grow to enormous scale incredibly quickly. So Facebook, for example, get started less than a decade later is the biggest website in the world. Google get started as a little obscure graduate student project and within 10 years it’s the world biggest media company. So we looked at this and say, “What is going here? What has changed to allow companies to grow so big, so quickly? And what are the characteristics that make it happen more often is Silicon Valley and in China than any other place?
Martin: For what type of companies does Blitzscaling apply?
Chris: So Blitzscaling is applied to an increasingly large number of companies, as you know a number of years ago Marc Andreessen came up with this thesis that ‘Software is eating the world’ and increasingly technology is becoming embedded in pretty much every industry. And while the book is going to focus primarily on high tech industry, there are industries that have gone through enormous changes in a very rapid way that have nothing to do with technology. So for example, in the oil and gas or energy industry, the shale oil boom over the past decade has just completely transformed the energy landscape in the United States that all took place because of a number of small Start Ups that very quickly became enormous. So I think it applies broadly and will apply to more and more industries as software continues to eat the world.
Martin: Can you simplify that the Blitzscaling mainly applies to companies who can benefit from economies of scale or is there anything else involved in that?
Chris: So what I would say is that Blitzscaling primarily focuses on companies where there are network effects and network effects mean that as you grow the number of nodes in the network, the value of the entire network grows far greater than the linear growth in the number of nodes. And one of the fundamental thesis we have about Blitzscaling is the reason why it has worked so well in Silicon Valley because of the incredible strength of the network here. There are only seven million people in the Metro Bay Area which is a tiny fraction of the world. There are seven million people here, there are seven billion in the world as whole but half of world’s most valuable Start Up companies are here in Silicon Valley and other half are in that other seven billion people. So like what’s going on here? It really is because there is a dense network of connections between investors, entrepreneurs, people who are employers, employees, professional service firms— all these people are able to come together very quickly in a way that you can’t in many other environments.
Martin: And from my perception of what has changed over the last 20 years or so is, the world has become more connected—
Martin: —because due to the fact that we have internet right now and the second thing is that here in the Silicon Valley you have so much capital poured in so that you can fund the rocket ship, so to speak, and if you then change the mindset of the people, then it’s key ingredients for scaling companies faster.
Chris: That’s Right. And the capital is obviously—The two most important things are the capital and the talent. And this is where Silicon Valley has long held an advantage but if you look at what’s happening over in China for example with the kind of financing that is going into the Didi Kuadi and other sorts of companies that are there. That Capital is now becoming more available globally than ever before and I know that in Europe there is a lot more capital available than was available in the past. And so, what we see happening is Blitzscaling is becoming more and more common in places outside of Silicon Valley because that very fact that you mentioned, because the world is far more becoming connected than it was before.
Martin: Imagine I am a Start Up or a CEO of a Start Up outside of the Bay Area and I read about your book and said “Hey, I should Blitzscale”. How did I do it?
Chris: So what you going focus on in terms Blitzscaling is picking the right moment to do so. So the Term ‘Blitzscaling’ comes from the term ‘Blitzkrieg’ and of course there is a bad history around that word and the folks who originally— the leadership that originally promoted it, but it is actually something very different than the traditional means of war. Blitzkrieg meant cutting loose from your supply lines and attacking far more quickly than anyone ever thought possible. In fact, during the battle of France and many people will say, ‘Well the French actually had better tanks than the Wehrmacht did, the Wehrmacht tactics and strategy overwhelmed them. So for us Blitzscaling is all about knowing when you have the right moment, when you are in the situation where all of a sudden you need to grow quickly, you have the opportunity to grow quickly, the capital is available the talent is available, being willing to make that decision.
So here’s a great example, I was just reading about Google the other day, it’s a fascinating story. So Google is enormously successful today, once upon a time it was a little tiny Start Up. And one of the things that Google did in its infancy was that it reached a deal with America Online to monetize America Online’s search and advertising and page views alike. And at the time Google was a relatively smaller company they had only ever raised 25 million, basically one rounding of funding and they had only ten million dollar left in the bank. And they signed a deal with America Online where they said, “AOL we’re going to take over ad sales, we’re going to take 15% as our cut, you take 85% percent and we’re going to guarantee you 150 million dollars a year in minimum revenues”. So company with ten million in the bank, went and struck a deal with what was then, sort of the giant in the field and guaranteed them 150 million dollars a year. Now that’s the kind of aggressiveness that is required in order to Blitzscale, it’s taking a risk, it’s doing things that feel uncomfortable, that don’t necessarily have 100% chance of succeeding but which are necessary in order to achieve the kind of scale that you need. Because once Google had that deal with AOL, once they have that vast volume of additional traffic, of course they were able to learn much more quickly, developed their monetization, ultimately in the end they never had any problems making those minimums.
Martin: And is there some kind of checkbox or checklist or so where I can say, “Ok, if these conditions are fulfilled then I should Blitzscale.
Chris: So there a couple of things the first of course, I think you referenced is the accessibility of Capital. A Capital is kind of the lifeblood of Blitzscaling. If you were able to scale up at this incredible rate and profits were just gushing in, that’s relatively easy to do. In case of Google they we’re profitable but they took on a gigantic commitment that was far bigger than anything that had in the past. But in many cases it is based on saying, “well we’re going to grow faster than strictly speaking efficiency would call for but it’s because we believe that this is a decisive point in time in the history of this industry and we have a chance to grow to scale where we will eventually be one of the winner takes all winners.
I think the other part of it besides the capital being available is looking at the overall situation around you. We are teaching a class on Blitzscaling at Stanford right now and we had a guest on Mariam Naficy who runs company right now called Minted and what was interesting is she chose not to scale the company very rapidly at the outset. So many years the company was relatively small, she only raised several single-digit millions and only in the past couple of years she raised another ninety million dollars to scale the company up and it’s growing now with over 500 employees and it’s growing extremely rapidly. But one of the reason she did that is, as the company began to grow out of its original niche it began to encounter other competitors and because there was now competition one of the things she said was, “Now I to be more aggressive growth. If I’m being ignored I might be willing to grow a little more quietly”, in her case she deliberately did that because it felt more comfortable but then when the competition was there she said, “Well I’m willing to feel uncomfortable in order to win” and that’s what the Blitzscaling came in.
Martin: What type of pain points are you feeling when you are doing Blitzscaling, especially in terms of organization, if you are growing from like 10 to 100 people in six month or from 100 to 1000 in a year, there are some organizational challenge, etc.
Chris: Absolutely, so one of the fundamental frameworks of Blitzscaling is that the organization changes radically at each stage and so we divided up into five different stages, we have a metaphor for this.
So the first stage is what we call “The family” this is what we call when you have ones of employees, when you have 1- 10 or so. And the whole thing about a family is everyone knows each other or they’re all under one roof, it tends to be informal there’s not a very set structure. And that fine when you starting out, in fact it could be very efficient if you have a group of people who are used to working with each other.
But as it grows, it eventually goes from family to “A tribe”, you may not have everyone under the same roof, everyone is not seeing each other every single day although everyone still knows each other. And now you’re starting to see some elements of organization, you may have some more specialization than before, “Hey I’m going to focus on engineering, I’m going to focus on operation, etc.” and that will take you from 10-100 employees or 10- 50 employees or something along those lines.
The next level up is what we call “The village”. Once you get to the village stage you may not instantly be able to recognize everyone when you see them. You’ve been in a company before with like 100 to 150 people, you start to approach Dunbar’s number and it’s difficult to have that same kind of relationship that you had when you were a tribe or even a family and so the notion is now all of a sudden the organization begins take on more of the characteristics that we think of, of a kind of a company there are going to be a functional areas, there are going to be senior managers, there is going to be additional managers that are hired in to help coordinate everything and it becomes more pronounced as it continues to grow and scale.
The next scale up after you get past the village stage is what we call “The city” phase. So if you think about a village everyone might – they see another village resident and be like, “Ok, yeah I kind of know that guy, I’ve seen him before”. You get to the city phase which is to say thousands of employees and their employees will never meet. Now all of a sudden you’re dealing with something that is less a unitary body where you can just have a single all hands and the CEO can shake hands with everyone and now you’re dealing with a set of constituencies, you need to know govern it and governance becomes increasingly important.
And that continues to level the next level up which is tens of thousands of employees which is “A nation”—a nation all of a sudden. A city often just sort of looks to govern itself and looks to its immediate surrounding, a nation now has to be aware of your Geopolitcs, it has to be aware of adjacent nations, of others players and the game of great powers. When a company has reached that stage, all of a sudden now you’re Google and you’re like, “Well, we had been cooperating with Apple but now we’re competing with Apple on Android, we’re competing with Microsoft on search but we’re also competing with them because we have Google Docs and they have Microsoft office”. And all the sudden the notion of how these greats nations interact with each other becomes a critical part of what you do as you’re Blitzscaling.
Martin: I totally agree, I think for every company no matter how fast it grows, if it gets really really big and will follow those 5 phases. The issue from my point of view for Blitzscaling is only that you are not doing this like ten, twenty years but maybe in one or two years—
Chris: Correct. And the reason why that’s so important is when a company grows to that scale, let’s say over a couple of decades, it’s never easy but it’s easier because people have the chance to scale and grows along with the company and there’s natural attrition, you bring in new people. When a company is scaling at this incredible rate from a couple of founders to thousands of employees and in less than a presidential administration of four years, the human being simply can’t scale that quickly and most human beings can’t. And so now you are trying to figure out how can I bring in new leaders and new managers and executives who have the experience to work at these higher levels of scale while still respecting the contribution of those who’ve come before, figuring out how to make sure people continue to have roles or if they no longer have roles, figuring out what the right transition and the right way to treat each other is. So that what makes that growth so challenging because you are scaling a rate that had faster than a human being can actually scale.
Martin: So does this mean that you should look for managers or employees in general that could potentially work in each and every of those five phases?
Chris: So that’s the interesting thing. A lot of people think, “well, let’s get somebody who has been able to do it all”, and that great. So if you can go out and hire Eric Schmidt or Larry Page into your company to work for you, you should do that but it’s very difficult to find that. In fact what you instead get is—there are people who will tend to specialize in bigger companies and people who tend to specialize in smaller companies. It is very rare that somebody’s going to have experience at all levels and even if they do have experience all levels they’re going to be better at one particular phase or another. So what we say instead is we have a couple of broad guidelines that you should follow. At the early stages of growth, during the family and tribal and village stages you’re probably going to hire a lot more generalist than specialists. Things are still very up in the air, things still need to shake out and having generalist allows you to have that flexibility within the organization, but as you grow and you reach these higher levels of scale you’re going to bring in more specialist because they have the right skills to manage that level.
The other principle we say is you really have focus at the current stage you’re at. A lot of companies have gone wrong by saying “Well I’ve only got ten people now but I’m going to be huge someday, let me hired somebody who’s already managed a thousand people”. The persons who’s managed a thousand people, those skills are completely different from the skill required to be a part of 10 person team. I am myself more of an early stage person. I tell people, “Listen if you need to figure out how to get your company on the map and you have no money I’m your guy. If you have a budget of a hundred million dollars that you need to spend, go find someone else because that’s a completely different set of skills”.
Martin: Is there a methodology how you would manage this transition? You’ve mentioned, “I have hired somebody a generalist”, and I mean you don’t want to fire those people, you want to either develop some other skill or put them in some other place but I find it quite hard to imagine how to really do this.
Chris: Yeah and it’s difficult and part of it is just being able to treat people with respect and treat people well even if it their role has to change. So for example, let’s say we bring in somebody as a manager, actually take the classic example of a founder of a company. Founder early on, founders are doing everything, this founder is running engineering, this founder is running all the business side of the world. Well, let’s say this founder who runs engineering as the company continues to scale doesn’t have experience running a hundred person engineering team and they’re not able to learn quickly enough.
Well now you need to bring in somebody else, so now you have to say, “Well for this founder, what are they going to do either going to do? Are they going to become a manager who works for this person? Perhaps. Are they going to become more of a CTO or somebody who has more of a strategic portfolio and doesn’t do direct day to day management? Perhaps. Are they going to focus on being a spokesperson or take on a completely different role that also a possibility. But the main thing is to say, “Look lets be explicit about what’s going on here we need a set of skills that are associated with a higher stage and you don’t currently have those skills. So you know if you want to grow into that you may want to work for someone and learn”. Take the example of Google for example, Larry Page was CEO of the company, he was the fellow who ran Google they brought in Eric Schmidt, the investor did as well, in order to have somebody who had experience managing a large organization, he’d help them grow but eventually after they’ve been doing this for long enough, Eric Schmidt and Larry Page and Larry can do it now, let’s bring him back as CEO, and then Eric gets to enjoy his well deserved respite as executive chairman, whereas Larry is now focuses on the day to day.
Martin: Cool. Do you have any other examples where we can really vividly show what it is to Blitzscale a company?
Chris: Absolutely. So a great example this is one that we’re actually going to probably use in the book comes from Reid’s days at paypal. This is a fascinating one. So paypal was growing incredibly rapidly, I think that the way they put it was the company was growing 5% a day, not a week, but a day. So it’s kind of nuts and because they were dealing with money any time something went wrong, people got very angry about it and so they would start emailing, the number of customer service tickets just kept getting bigger and bigger and bigger. And the way Reid puts it is, there were enough people who are trying to reach us that they went into Palo Alto phonebook, discovered the line for Paypal and just randomly dialed the extension in order to reach someone. At any given time, every single phone in the office was ringing and if you picked it up there was an angry customer on other end. So well, what do you do? Well you know what you’re now in a situation where efficiency is not the primary concern, just dealing with this volume is the primary concern, so what actually happened was Paypal made a deal with the state of Nebraska and flew out to Omaha, Nebraska, shook hands with the governor, got a building and they flew basically the entire team of the company and they were not that many people in the company at that point to do group interviews to hire a hundred customer service in people in two weeks.
Martin: And they didn’t have any customer service agents before?
Martin: Wow, okay.
Chris: This was inefficiency right, so it was enormously inefficient. I think that the statistic was of the people they hired in that first frantic wave, 70% had left within a month, either because they didn’t work out or because they said, “This is insane I can’t deal with this”. But they actually grew that customer call center in Omaha, Nebraska and that became the customer call center for Payal that was there all the way through the IPO and acquisition by Ebay and as we put it, they took one of Paypal’s early employees and center out to Omaha—a gentle, young, young smart generalist and said, “ Figure out the problem, make it happen, none of us knows anymore than you do”. But she did make it happen as it turns out she also met her husband while she was out there so it all worked out in the end.
Martin: I guess not every Blitzkrieg or Blitzscaling is successful, do you have any stories of Blitzscaling who have failed?
Chris: There are definitely some cautionary tales. Just recently in the news for example is a company called Home Joy that was a service that allow you to go online and book people to come clean your house. There was some debate about whether or not that good service or good business model as a whole. But what was definitely true and what the founders will tell you is that they try to scale up too quickly. They decided, you know, this is the right time to Blitzscale, we’re going to go into multiple cities we’re going to open up different offices and there’s has been plenty of other companies who follow the same path, basically they said, “We figured this out now let’s expand everywhere”. And often times that ends badly. In the case of Home Joy, just too many commitments, fundamental unit economic problems and ultimately the company went under despite six months before being hailed as one of the hottest companies on the internet.
Martin: But do you think this was a problem due to Blitzscaling or scaling in general or was it just that even the scaling would not have to helped the unit economics?
Chris : So that’s the interesting point, so I think that the point is the scaling wouldn’t have necessarily helped the unit economics. You have to recognize that when your unit economics are poor enough it is not a time where you can successfully Blitzcale. Their thesis presumably was that this is a land grab and we need to get as much market share as possible and scale will provide returns and we talk in the book about we call the first scalar advantage; the first person to reach massive scale at any given industry has a significant advantage. It’s not the first person to enter, if early entry allows you to become the first person to reach scale, then great. But if you’re not the first person to reach scale—and the example use is as I recall the first social network that I remember was called Ryze, well guess what they’re not around anymore. I think they actually are but obviously there not important. What mattered was being the first to reach the scale and different levels of scale. Friendster were the first to sort of reach scale, but fell upon hard times. Myspace reached another level of scale but again they were some fundamental problems. What that shows you is that Blitzscaling is not a panacea. Just growing is not enough to make a business successful. The business underlying has to be successful, but in order to take full advantage of the market place that rapid growth can be a key tool.
Martin: Great, Chris thank you so much for your time.
Chris: My pleasure.
Martin: And maybe next time if you’re thinking about starting a company, just check whether at some point in your start up journey that you try to Blitzscale as well. Thank you so much, Great.
Chris: Thank you,
Martin: Thank you, Chris.
Chris: It such a pleasure.
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