Frank Thoughts: The Blitzscalers
Frank Boland
January 07, 2021

Blitzscaling is the business model of this 21st century’s knowledge/service based economy. The word comes from the German World War II attack concept called Blitzkrieg, meaning “lighting war.” This attack model always had high risk because of the necessity to combine surprise with a strong force.  Another risk: the supply chain had to keep up. It is now a concept used by varied businesses such as DoorDash, Airbnb and Uber. This attack model is moving into high cost businesses with tremendous speed and then rapidly scaling up. Price is their metaphor for armored tanks and blitzkrieg forces.

Their supply chain is not food or munitions, but money; money provided by venture capital firms. As long as VC firms continue funding, for a ten year period of probable losses, they will drive previously dominant companies out of business. Last year, that was the average length of time for companies going public. According to IPO expert, Professor Jay R. Ritter of the University of Florida, 83% were still losing money while going public. Most entrenched competition cannot exist for ten years without making money. Such has been the impact of blitzscalers “capturing” control of the internet.

The model was developed by, Reid Hoffman, a very successful venture capitalist. Most VCs are fortunate to have one successful startup. But as Peter Lynch used to say about stocks, “It’s not the number of times you are right, but the magnitude of when you are right.” Reid has had three of huge magnitude. He backed PayPal, Facebook and Linkedin. The last one, bought by Microsoft, made him a billionaire. Having taught Blitzscaling at Stanford University in 2015, he is now a partner of Greylock, one of the oldest and most prestigious venture capital firms in the investment world. The firm was started in Boston in 1965, essentially the dawn of technology.

As one might expect with a business model based on war, leadership by entrepreneurs running such a model can often be contentious. Uber’s founder, Travis Kalanick, is an example. But there is a twofold danger with this whole gestalt concept. First, you could outrun your supply chain if the venture capital firm stopped funding. Secondly, the business itself could be faulty. It’s not hard to sell any product, or service, for seventy-cents that cost a dollar to make. But you must have a large amount of VC cash in reserve. Only time will show if prices can go higher while costs move lower. If not, there is a problem.

Blitzscaling began with the massive amount of venture capital funding available after the debt crisis of 2008-2009. The startups they funded became known as Unicorns because of their perceived mythical rarity. With over 400 Unicorns – companies having valuations in excess of a billion dollars - currently lined up to go public, that “rarity” is gone. This puts more pressure on venture capital firms to have blitzscalers go public. Again, performance always involves magnitude. It’s Pareto’s law of 80/20.

However, that magnitude can never be known in advance.  Imagine you’re out driving your car when suddenly a bird flies across your view. You watch it as the bird flies toward a telephone line some 100 yards ahead. As you get closer, you realize there are 30/40 birds already on the line. Then, suddenly, they all take off forming a flying V. The one flying at the front of the V – the leader of the flock - could never have been identified ahead of time. The same is true in a stock portfolio. At the time you create a portfolio, you believe they will all do well. But the one thing you can be sure of is, if you hold blitzscalers in your portfolio that are unable to make money now … or in the future … well…

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