Reid Hoffman | Bear Market Blitzscaling

TL;DR

Blitzscaling still applies in a bear market because it is always relative: speed remains the decisive variable in competition regardless of conditions. Founders simply tune the knobs more narrowly, spending capital carefully and demonstrating revenue or profitability instead of pursuing growth at any cost. Down markets can even favor new startups because rival startups are more impeded by scarce capital.

Transcript

foreign the co-author of Blitz scaling and I'm here once again with my co-author and old friend Reed Hoffman the co-founder of LinkedIn and investor at Greylock partners now Reed let's start with the broader context a lot has changed since we released Blitz scaling in 2018 both in the startup world and the World At Large what are some of the change... Read More

Key Insights

• Blitzscaling is defined as prioritizing speed over efficiency in an environment of uncertainty, and it centers on how you spend financial, human, and other capital to outpace competition.
• Blitzscaling does not go away in a bear market because it is always relative: business is fundamentally about competing for products, markets, customers, employees, and capital, and speed is always a critical function in competition.
• In a bear market founders become far more careful with capital, tuning the knobs narrowly, while in a bull market they might experiment with and deploy capital on every possible idea to accelerate.
• During downturns founders may compete on longevity and surviving to thrive, yet still tell a story of market growth because investors still want to see that a company can get there.
• An investment thesis is what you bet on regarding the way the world is moving and what you can do to achieve a result; the LinkedIn thesis bet that Web 2 identity would grow and individuals would own their own network.
• Network-effect consumer internet markets are Glengarry Glen Ross markets where first prize is a Cadillac, second is steak knives, and third is you're fired, so speed to first place matters greatly.
• Recessions and bear markets are good times to start a business if you can get capital and go, because competitors are far more impeded, making it easier to build great businesses than during up markets.
• The primary competition for startups is other startups, not tech giants like Google or Microsoft, and rival startups are most influenced by availability of capital, markets, and talent.

Questions & Answers

Q: Does Blitzscaling still apply during a bear market?

Yes. Reid Hoffman argues it is a mistake to assume Blitzscaling goes away in a troubled market. Blitzscaling is always relative because it concerns speed, which is relative motion. Business is fundamentally about competition: competing for products, services, markets, customer affection, employees, and capital. Speed is always a critical function in that competition, so even when capital is scarce, founders still seek to outpace rivals, just with more carefully tuned knobs.

Q: What is the definition of Blitzscaling?

Blitzscaling is prioritizing speed over efficiency in an environment of uncertainty. A natural part of it is how you spend capital, whether financial capital, human capital, or other capital, in order to prioritize speed. When capital becomes more precious and capital markets are not flowing, the degree to which you spend capital inefficiently naturally drops, but the core aim of outpacing competition through speed remains constant across market conditions.

Q: How should entrepreneurs update their investment thesis in a downturn?

An investment thesis is what you bet on about how the world is moving and what you can do to achieve a result. In a downturn, founders should reassess capital availability, what they must prove for the next round, how quickly they need revenue, free cash flow, or profitability, and what competitors are doing. The gameplay to reach the next stage of capital and what you must demonstrate in market or revenue terms all shift as conditions change.

Q: Why is starting a business during a bear market actually a good idea?

Hoffman says the answer is yes, provided you can get the capital and go, because your competition will be far more impeded. It is actually easier to build great businesses during down markets than up markets because of the competition factor. Rival startups, which are the primary competition, are most influenced by capital availability, market access, and the ability to hire talent, all of which are constrained in a downturn, creating a differential advantage.

Q: Who is a startup's primary competition?

Hoffman notes that most people misunderstand competition by thinking the primary threat comes from large tech giants like Google or Microsoft. In fact, the primary competition is other startups. Those other startups are most influenced by capital availability of markets, capital availability of talent, and the ability to hire talent. Because these factors tighten in a bear market, competing startups falter, which is part of why downturns can be favorable for launching.

Q: How does the Amazon example illustrate balancing growth and profitability?

Chris Yeh points to Jeff Bezos shifting from growth to profitability as necessary. Amazon shifted back and forth several times between focusing on growth and focusing on productivity. The overall objective was always growth toward being the everything store, but there were times Amazon demonstrated its ability to generate revenues or be profitable in order to enable it to continue financing its growth. That adaptation is a key part of navigating changing conditions.

Q: What are Glengarry Glen Ross markets in Blitzscaling?

In consumer internet markets with network effects, Hoffman describes Glengarry Glen Ross markets where first prize is a Cadillac, second prize is steak knives, and third prize is you're fired. It makes a big difference whether you finish first, second, or third, so speed to capturing and realizing that position matters greatly, even in bear markets. This is a core reason speed remains decisive regardless of the broader economic environment.

Q: What was the LinkedIn investment thesis?

The LinkedIn thesis bet that Web 2 identity would grow and people would use their real names to advantage their real-life work, despite counter-memes against posting a CV. It anticipated business models including job seeking and recruiting, plus others building over time, with both individuals and organizations participating. Crucially, it focused on individuals owning their own network, versus competitors who assumed companies owned professional networks because they provisioned computers and address books.

Summary

In this video, the co-author of "Blitzscaling" and co-founder of LinkedIn, Reed Hoffman, discusses the changes that affect how entrepreneurs should approach blitz scaling in today's startup world. He emphasizes the importance of prioritizing speed, even in bear markets, and shares insights on how entrepreneurs can update their investment theses to be successful.

Questions & Answers

Q: What are the changes that affect the way entrepreneurs should blitz scale today?

Reed Hoffman explains that the changes relate to the availability of capital and the need to demonstrate efficient use of capital during bear markets. While startups need to be cautious about their capital, they should still prioritize outpacing their competition and seek growth. Entrepreneurs need to carefully consider their capital allocation and market strategies to navigate through the changes in the startup world.

Q: What are some examples of how entrepreneurs have updated their investment theses in order to be successful?

Hoffman provides examples of investment theses from companies like LinkedIn. He highlights the importance of understanding market trends and providing a service or product that aligns with those trends. In the case of LinkedIn, the investment thesis focused on web identity, job-seeking, and professional networking, all of which were expected to grow in the web 2.0 era. The investment thesis needed to adapt to the changing market conditions, such as the availability of capital and competition.

Q: Is now a good time to start a company and how do entrepreneurs adapt their strategies in a bear market?

Hoffman acknowledges that it is much harder to raise capital in a bear market, making it difficult for first-time entrepreneurs without a network. However, he also believes that starting a company during a bear market can create differentiation and advantage over competitors who might be more impeded. While there are risks and challenges, starting a company during a bear market can be fruitful if the entrepreneur can secure funding and navigate through the obstacles.

Q: How does risk management play a role in blitz scaling during a bear market?

Risk management becomes crucial during bear markets as the cost of error and failure is higher. Entrepreneurs need to strike a balance between defense and offense. They should focus on defense first, which includes cross-checking potential risks and adjusting operations accordingly. Once the defense is set, entrepreneurs can consider playing offense by taking calculated risks and seizing opportunities that their competitors might not be able to capture.

Q: How have established companies and employees at blitz scaling companies benefited from playing offense during a bear market?

Hoffman explains that established companies and employees can also benefit from playing offense during a bear market. Joining a startup that can navigate through the tough times and succeed on the other side can result in higher value for employees. Similarly, established companies can take advantage of the lower competition for financial and human capital to grow and amplify their success. This requires a strategic mindset that focuses on offense after setting up strong defenses.

Q: What advice does Hoffman have for non-entrepreneurs, such as leaders at established companies and regular employees?

Hoffman advises non-entrepreneurs to consider the principles of blitz scaling and apply them in their roles. They should prioritize defense, carefully manage risks, and then think about offense. Non-entrepreneurs can also consider joining startups that have the potential to succeed in a bear market, as they can be valuable investments in terms of career growth. The key is to navigate risks intelligently and seize opportunities while focusing on long-term success.

Q: How does the current bear market present opportunities for entrepreneurs and individuals?

Hoffman emphasizes that the current bear market presents opportunities to build a company or join a company that may no longer face as much competition for capital and talent. He advises securing defenses, such as having enough money, and then considering offense. This time of change and uncertainty can create new opportunities that were not available before, and optimism is vital for shaping the future through entrepreneurship.

Takeaways

In summary, the key takeaways from this video are as follows:

• Prioritize speed, even in bear markets, and seek to outpace competition.
• Update investment theses based on changing market conditions, capital availability, and competition.
• Starting a company in a bear market can create differentiation and advantage, but securing funding may be more challenging for first-time entrepreneurs.
• Risk management is crucial during bear markets, with a focus on defense before moving to offense.
• Established companies and employees can benefit from playing offense in a bear market, seizing opportunities that competitors may miss.
• Non-entrepreneurs should apply blitz scaling principles to their roles and consider joining startups that can navigate the bear market successfully.
• The current bear market presents opportunities for entrepreneurship and career growth, but careful decision-making and optimism are essential.

Summary & Key Takeaways

• Reid Hoffman revisits Blitzscaling with co-author Chris Yeh, defining it as prioritizing speed over efficiency amid uncertainty. Though capital markets have tightened since 2018, he argues Blitzscaling does not disappear because it is always relative: speed remains a critical variable in competing for markets, customers, employees, and capital.

• In a bear market founders tune the knobs narrowly, spending capital carefully rather than experimenting freely as in a bull market. They may emphasize longevity and surviving to thrive while still telling a growth story, and updating the investment thesis around capital availability, revenue timelines, and competition becomes essential.

• Hoffman cites Amazon shifting back and forth between growth and profitability to finance its goal of becoming the everything store. Great entrepreneurs are infinite learners because competition, markets, technology, and strategy constantly change, and down markets can favor new startups since rival startups are more impeded by scarce capital and talent.