Thread by @ulaar

Tim O’Reilly on The fundamental problem with Silicon Valley’s favorite growth strategy | qz.com/1540608/the-pr…

Long evocative read. Chiding one & all using Hoffman/Yeh’s Blitzscaling as canvas. Key quotes on thread:

Blitzscaling promises to teach techniques that are “the lightning fast path to building massively valuable companies.”
Blitzscaling “prioritizes speed over efficiency,” and risks “potentially disastrous defeat in order to maximize speed and surprise.”

O'Reilly challenges notion that "network effects" doctrine (as imbibed by SV) is THE way forward.
A strong case can be made that blitzscaling isn’t really a recipe for success but rather survivorship bias masquerading as a strategy.

Had O'Reilly followed Hoffman/Yeh's advice for GNN (pre-Yahoo web directory) and Website (pre-Netscape web server), it would have been a contest they'd have likely lost to that era's blitzscalers who also got disrupted eventually.

O'Reilly critiques H/Y as failing to address the Winning at all costs imperative made infamous by Kalanick's Uber. Sidecar's Sunil Paul original visionary, fast followed by Zimmer/Green (Zimride->Lyft) and fast f#$#%^@ by Uber.

Blake, the cynical sales manager played by Alec Baldwin in Glengarry Glen Ross, appears as an oracle: “As you all know, first prize is a Cadillac Eldorado. Anyone wanna see second prize? Second prize is a set of steak knives. Third prize is you’re fired. Get the picture?”

H/Yeh’s claim that companies like Google, Facebook, Microsoft, Apple, and Amazon are icons of the blitzscaling approach, this idea is plausible only with quite a bit of revisionist history.

Each company achieved profitability (or in Amazon’s case, positive cash flow) long before its IPO, and growth wasn’t driven by a blitzkrieg of spending to acquire customers below cost, but by breakthrough products and services, and by strategic business model innovations.

These companies didn’t blitzscale; they *scaled sustainably*.

None of these companies (except arguably Amazon) followed H/Y's blitzscaling. VC-backed blitzscaling was far less important to their success than product and business-model innovation, brilliant execution, & relentless strategic focus.

Hypergrowth was the result, not cause of these companies’ success. Ironically, H/Y book is full of superb advice about innovation, execution, & strategic focus, but it’s wrapped in the flawed promise that startups can achieve similar dominance by force-feeding inefficient growth.

Ben Graham (father of value investing): “In the short run, market is a voting machine. In the long run it’s a weighing machine.” Short term, investors place bets on PV of the future earnings of a company. Long term, market discovers whether bets were right (weighing machine.)

According to University of Florida's Jay Ritter, 76% of all IPOs in 2017 were for companies with no profits. By October 2018, the percentage was 83%, exceeding even the 81% seen right before the dotcom bust in 2000.

(My take: let's not celebrate Uber & Lyft IPOs yet)

Brief history of non-blitzscaled yet successful startups: Mailchimp, Atlassian, Shutterstock, Basecamp, RxBar. Indie.vc promoting a new kind of venture financing instrument: convertible loan designed to be repaid out of operating cash flow rather than via an exit.

Chamath P invoking Bill Gates platform definition: "A platform is when the economic value of everybody that uses it exceeds the value of the company that creates it.”
FB Platform failed that definition.Uber & all ride sharing co's fail that definition.Gates/MSFT also failed.

The "Do no evil" Google also failing that platform definition.
2014: AdWords rev (51%), AdSense (49%)
2018: AdWords (82%), AdSense (18%)
2016: 58% of mobile searches lead to organic clicks; 2018 number down to 39%
# of 'no clicks' rises from 41% (2016) to 61% (2018).

Microsoft has found its mojo after Nadella reminded them about the Gates/Allen creation myth "build technology so that others can build technology." > apparently their new sense of purpose. Longer read here: fortune.com/2019/01/15/dat…

Logan Green and John Zimmer, the founders of Lyft, are idealists whose vision was to reinvent public transportation. But having raised billions using the blitzscaling model, both companies are subject to the same inexorable logic: they must maximize the return to investors.

Their race to monopoly has ended up with a money-losing duopoly, where low prices to entice ever more consumers are subsidized by ever more capital. This creates enormous pressure to eliminate costs, including the cost of drivers, by investing even more money in technologies like

autonomous vehicles, once again “prioritiz[ing] speed over efficiency,” and “risking potentially disastrous defeat” while blitzscaling their way into an unknown future. Unfortunately, the defeat being risked is not just theirs, but ours.

Microsoft and Google began to cannibalize their suppliers only after 20 years of creating value for them. Uber and Lyft are being encouraged to eliminate their driver partners from the get-go.

As an industry and as a society, we still have many lessons to learn, and, apologies to Hoffman and Yeh, I fear that how to get better at runaway growth is far from the most important one.