Reid Hoffman | Bear Market Blitzscaling

Well, let's start with a quick rehash of what's important about blitzscaling. First, the definition: prioritizing speed over efficiency in an environment of uncertainty. And naturally, part of that is how do you spend capital—whether it's financial capital, human capital, or other capital—in order to prioritize speed. And then when capital becomes much more precious, when the capital markets aren't flowing as much, then the degree to which you will spend capital inefficiently is much lower. That's a natural outcome. And then people would naturally say, well, that means that of course during times like now where you have a strongly troubled market, blitzscaling goes away. That would be a natural inference. And the reason why that's incorrect is because blitzscaling is always relative because of speed—it's relative motion. And so it's still the question about, in business, business is fundamentally around competition. How do you essentially compete for products and services, compete for markets, compete for customer affection, compete for employees, compete for capital? Speed is always a critical function in competition. The times where speed isn't a highly relevant variable in competition are very obscure and kind of more minor things.

So then you say, well, okay, so to repeat your question, what are some changes you might think affect the way entrepreneurs should blitzscale? Well, the certain thing is you're going to be very careful about your capital and you're going to be very careful about where you might be choosing to spend that capital in order to outpace your competition. But it's still the case that you will be outpacing your competition, you will be seeking to outpace your competition. Now you may outpace them in longevity, in surviving in order to thrive. Whereas most of the competition, for example, might be telling stories of endurance, you might still be telling a story of market growth. Because by the way, investors still know that that's what they want, right? Presume that you can get there, presume that new capital is hard to come by, but you're still trying to get there. So those are the knobs by which you would be looking as an entrepreneur during a bear market about how you would think about blitzscaling. Whereas in, of course, in a bull market, every possible idea that you could have to possibly use capital to accelerate, you might just experiment with and deploy. Here you might be much more careful. So obviously the knobs are tuned much more narrowly, much more in a contained fashion. But those are the frameworks by which entrepreneurs should be thinking about blitzscaling.

So as a refresher, part of what an investment thesis is, is what are the things that you're betting on—the way the world is, the way the world is moving, and what you can do in the world in order to achieve an outcome, a result. Part of that is, for example, you might be saying, okay, in the early days of the internet, it was about transferring files—whether they're HTML files or video files or other kinds of things—and it's the distribution of that through search, through portals, other kinds of things. And that was what was kind of key to what was empowering a whole bunch of different businesses in the internet. Then you get to Web 2 and you say, well, it's about identity and how networks of people work together. And you say, well, okay, the LinkedIn investment thesis is the Web 2 identity is going to grow, people are going to be willing to use their real name to advantage their real-life activities and work. That actually, in fact, even though there's a lot of counter-memes against putting up your CV, LinkedIn will enable that. There's a set of different business models which will include job seeking and recruiting but also others that will build over time. That LinkedIn network can be a platform for all of these things, and that both individuals and organizations will all participate in this. And that was essentially the LinkedIn investment thesis—a combination of what's currently happening in the world, the technological trends, and then what are the specific things, including providing a service that's focused on individuals owning their network versus, by the way, the competition, which is saying, well, the companies own your professional network, not you, because they provision your computer with your address book and your communications. So they own your network because they thought that owning that data was it, versus the social relationship and the way that you navigate. And that was the investment thesis of LinkedIn, which obviously worked and elaborated and kind of generated as a way of doing it.

Now, part of changing times changes the substance of that investment thesis. So it says, well, okay, so what's your availability of capital? What will you have to prove in order to get the next round? How quickly do you need to get to revenue? Do you need to get to free cash flow? Do you need to get to profitability? What is your competition doing in terms of the investment thesis? What do you need to do in order to beat the competition? That's of course part of the blitzscaling thesis—that there's a number of important areas, especially in the consumer internet with network effects, where what we describe as Glengarry Glen Ross markets, where first prize is Cadillac, second prize is steak knives, third prize is you're fired. It really makes a big difference between first, second, and third places. And so speed to that and realization of that matters even, of course, in bear markets and everything else. But competition makes a difference because you say, well, actually, if the competition is all falling by the wayside, the competition is going to die or going to totally retrench and not focus on growth, then it could be something if you can—that can become a differential advantage. And it's one of the reasons why people say, well, during recessions or during bear markets, is that a good time to start a business? The answer is yes, if you can get the capital and you can go, because your competition will be far more impeded. It's actually easier to start great businesses during down markets than it is to create great businesses during up markets because of that competition factor. And that's again one of the things that most people misunderstand about competition—they think the primary competition is the large tech giants like Google or Microsoft or others. And actually, in fact, it's other startups. And other startups are most influenced by capital availability, market capital availability, talent, ability to hire talent, etc. And that's part of the reason why it's such a great time to do that. And that's part of how you would look at updating your investment thesis, because you'd say, well, okay, where does my competition fit in the investment thesis? What is the gameplay that I need to go to to get to the next stage of capital? And what do I need to be demonstrating, either the market or in revenue? Classically, during bull markets in consumer internet, you go, hey, I'll get to revenue much later, everything else is really important, market capture is most important. Whereas you say, well, actually, in fact, in capital-scarcity markets, demonstrating that you can be capital efficient, that you can get to revenue, that you can get to revenue break-even, etc., then become much more important even in raising money, let alone in getting to revenue profitability and demonstration. And so that's the kind of thing that you're looking to do, and that's the kind of thing you would look at as updating your investment thesis as entrepreneurs.

Yep, and exactly. It's part of—look, one of the things that is a really key part of entrepreneurship, part of the reason why we say that great entrepreneurs are infinite learners, is because you're learning a whole bunch of different things. And that learning is not learned once and then that's it, because competition changes, the market changes, technology changes, go-to-market strategy changes, market for customers, market for capital, and what you're doing may be differential depending on what's your current position, what are your current assets, what are your current capabilities. And so all of this changes what your strategy might be, what your investment thesis might be. And so the fact that it goes, well, right now we're—you know, the thing that people like to say is growth at all costs. And that's never quite true. It's always good slogan rhetoric because it's not at all costs. The cost is a fundamental part of business, and how you're spending that cost in a differential strategy to create a long-term valuable business is what good entrepreneurship is, what good business strategy is. But sometimes you may be going growth at highly efficient spends as a way because you're prioritizing growth, and other times you go, well, no, no, we need to have growth but we need to have efficiently economically spent growth in order to be navigating the next phase. And that's part of the, okay, focus on profitability here, focus on—because there's a lot of different ways of focusing on profitability. Focus on demonstrating you could be profitable that an investor might be willing to give you money. Focus on getting profitable, then you don't need money necessarily other than possibly for funding growth. Focus on operating margin, well then investors might buy and sell your stock at higher multiples and higher prices. And all of that kind of fits into being an intelligent entrepreneur, CEO, founder, business leader.

100%. Now, it doesn't mean that it isn't much harder to raise capital. So when you're a first-time entrepreneur and don't have a lot of background, don't have a lot of network, you may not be able to start a company in this kind of time. You may need a more open, more bold capital market for someone to be able to take a risk on you, because capital will be far more constrained, far less generally available. But on the other hand, if you can start a business and you can raise the capital and you can get going, it's a way to get a lot of differentiation between you and the rest of the possible competitors. And this is actually one of the funny things that I see in talent flows—a lot of talent flows are going, oh, I should go back to kind of safe companies like Microsoft and Google and everything else and do that. And it's like, well, look, you can do that totally fine, but it's also a very good time to join the startups that will get through this, because they'll actually be worth a lot more because they will have succeeded past competition. Because joining companies is another form of investing, and it's a good time to invest in the ones that actually, in fact, can get through the down times, because their value on the other side will be highly magnified. And it's a similar reason for potentially starting a company. Now, you have to start a company that—it's the higher beta to a higher alpha kind of outcome, where you're like, well, if you can pull it off, if you can get it started, now's a really good time. It's harder to pull off, and so therefore you might also decide to defer, because making intelligent decisions about your efforts to start a startup is a key thing to do.

So, you know, there's not one simple slogan because it depends on the circumstances that you're in. That's part of the reason why—and what you think you can achieve, what your level of risk appetite is, what your ability to navigate risk. That's the gesture at the ABZ planning, because it's a risk planning and mitigation framework to navigate risk intelligently. And so it depends. So like, for example, if you said, me as an entrepreneur, well, I started working on LinkedIn in 2002, which is still deep in the dot-com winter, and kind of working my way through that. That was a good time to do it. I was able to do it because of the success of PayPal. Similarly, I would do that as an investor. I'm active because I actually think the right projects done now will have a higher ability to succeed, and so that's also positive in doing this. On the other hand, there will be lots of startups that fail or fail to get off the ground. And so that's not saying, oh, no, no, it's going to be great times all around. And that's part of making good decisions, having the intelligent risk frameworks applied, navigating and pivoting and changing based on the things you're finding, getting really good advice, having that advice be why would this fail, why would this not work, because not having an irrational belief in just the success of what you're doing, but approaching it in a risk-intelligent and a strategy-intelligent way. Those are all the concepts that apply, which in some cases will be really, really spectacular. But obviously you have to navigate more landmines and speed bumps and death traps and pitfalls as part of doing it, because that's part of what a bear market means.