Decoding Blitz and Sustainable Scaling for Startups, and Why Founders Should Pick One Over the Other

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Startup scaling is hard work. So, be careful how you choose to scale your startup. While blitz scaling focuses on speed over efficiency, sustainable scaling prioritizes efficiency in the face of uncertainty. It’s up to you, which way you want to go.

As an entrepreneur, I have been involved with startups for over two decades — both in Silicon Valley and India. During this time, I have witnessed a sea change in the startup ecosystem. Startups today can attract huge funding even before a product is proven. Investors driven by an apparent ‘fear of missing out’ invest heavily, which in turn puts pressure on entrepreneurs to scale prematurely. This was not the case a decade or so ago. Entrepreneurs had to prove that they had a market-fit product before they scaled.

As entrepreneurs, we are in a hurry to prove our ‘killer product’. We believe we have a better mousetrap. We think we have a huge TAM (total addressable market) and we can scale faster than the rest. There are two ways to scale — the classical, old-fashioned way or via blitz scaling.

The basics of blitz scaling

The premise goes like this.

When a startup matures to the point where it has an awesome product, identifies a clear and sizable market, and a robust distribution channel, it can become a scaleup — a world-changing company that touches millions or even billions of lives. This is Silicon Valley’s blitz scaling.

Blitz scaling focuses on speed over efficiency. The term blitz scaling was popularised by Reid Hoffman of LinkedIn fame and Chris Yeh in their 2018 book. The term blitz in German means lightning. The authors state that if you want to grow exponentially, then blitz scaling is for you. They claim it’s a lightning-fast path to building massively valuable companies. It’s a land grab — achieve massive scale at incredible speeds with a lot of money, to seize the ground before your competitor does. It’s like the strategy of Nazi generals in World War II. While blitzkrieg worked well in Poland and France, it failed miserably during the invasion of Russia. So, land grabs don’t always work out.

The key tenets are (a) Make sure that you have a product-market-fit and operational scalability (b) Pay attention to TAM (got to be massive), strong network effect, a distribution channel, and high gross margins (c) Grow rapidly while remaining sustainable at all times.

So, first, build a minimum viable product and test market it. Second, focus on network effects. At its core, blitz scaling depends on network effects (demand-side economy of scale, not to be confused with traditional supply-side economies of scale). We see network effects in popular online platforms such as Amazon, Facebook, Twitter, Google, AirBnB, LinkedIn, Uber, Ola, Swiggy, Zomato and for that matter DriveU.

These are all two-sided marketplaces. The more users on each side of the marketplace, the more value it generates for users on both sides and delivers marginal effects to attract non-users to the platform. As more users are ‘locked in’, competitors are devoid of oxygen to sustain themselves and are forced to give up. The third important aspect of blitz scaling is to ensure that you have enough runway to achieve these goals.

Blitz scaling and duopolies

Let’s take a dive into the duopolies in India such as Uber versus Ola, Zomato versus Swiggy, Bounce versus Vogo, Zoomcar versus Drivezy, and so on. To attract users, companies offer huge incentives (unit economics be damned), consequently incur massive losses quarter after quarter, year after year. Investors keep pumping money at breathtaking valuations to cover these losses. An arms race between well-funded startups is set up. This is the story of many unicorns today.

Over the past decade, many of these startups have attempted blitz scaling. While entrepreneurs and investors are enthralled about it, it is not for the faint-hearted. Only a handful ever succeeded while a vast majority failed miserably, or pivoted to a completely different business, or have been forced to sell their company at a loss or, worse, shut down.

There are many notable blitz scaling failures in the transportation sector — including startups such as Bounce, Vogo, Drivez, Uber, Lyft, and even Ola Cabs. After raising USD200 million for scooter sharing, Bounce pivoted to manufacturing electric scooters. After raising USD200 million, Vogo was recently acquired by Chalo for undisclosed equity (read: fire sale). After raising USD150 million, Drivezy shut its operations last year. Lyft raised a total of USD7.2 billion in funding and yet remains unprofitable. Operating losses are still at 30% of revenue and investors just don’t see a path to profitability.

Ola Cabs founder Bhavish Aggarwal, after having raised USD5 billion in 29 funding rounds, has now decidedly moved on to Ola Electric, a two-wheeler EV manufacturer. When you examine why these companies found it difficult to profitably scale, you will see that they blitz scaled without building a sustainable customer value proposition nor did they pay attention to unit economics.

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