'The Fundamental Problem With Silicon Valley's Favorite Growth Strategy' (qz.com)

Tim O'Reilly, writing for Quartz: The pursuit of monopoly has led Silicon Valley astray. Look no further than the race between Lyft and Uber to dominate the online ride-hailing market. Both companies are gearing up for their IPOs in the next few months. Street talk has Lyft shooting for a valuation between $15 and $30 billion dollars, and Uber valued at an astonishing $120 billion dollars. Neither company is profitable; their enormous valuations are based on the premise that if a company grows big enough and fast enough, profits will eventually follow.

Most monopolies or duopolies develop over time, and have been considered dangerous to competitive markets; now they are sought after from the start and are the holy grail for investors. If LinkedIn co-founder Reid Hoffman and entrepreneur Chris Yeh's new book Blitzscaling is to be believed, the Uber-style race to the top (or the bottom, depending on your point of view) is the secret of success for today's technology businesses. Blitzscaling promises to teach techniques that are "the lightning fast path to building massively valuable companies." Hoffman and Yeh argue that in today's world, it's essential to "achieve massive scale at incredible speed" in order to seize the ground before competitors do. By their definition, blitzscaling (derived from the blitzkrieg or "lightning war" strategy of Nazi general Heinz Guderian) "prioritizes speed over efficiency," and risks "potentially disastrous defeat in order to maximize speed and surprise."

Many of these businesses depend on network effects, which means that the company that gets to scale first is likely to stay on top. So, for startups, this strategy typically involves raising lots of capital and moving quickly to dominate a new market, even when the company's leaders may not know how they are going to make money in the long term. This premise has become doctrine in Silicon Valley. But is it correct? And is it good for society? I have my doubts. Imagine, for a moment, a world in which Uber and Lyft hadn't been able to raise billions of dollars in a winner-takes-all race to dominate the online ride-hailing market. How might that market have developed differently?

Comments

Just follow the Trump model:

[Anonymous Coward]

Don't pay your workers, cut corners, and if you fail completely just file for bankruptcy and let your creditors clean up the mess, multiple times, because you're a feckless coward who doesn't understand legitimate business.

author forgets that people are selfish

[Ionized]

author is focused on the overall market or societal impact

Which of course doesn't matter at all to the founders & investors.

blitzscale is the 'greedy' approach. entrepreneurs and investors typically just care about their own company succeeding, and to hell with what that means for the market in general or consumers. they WANT to build a monopoly, duh.

Foreshadowing?

[jythie]

Ahm.. wasn't blitzkrieg something that ultimately did well as a short term tactic but failed as part of a larger strategy? Blitzkrieg is great if you care about winning the battle but don't care about losing the war.

Which I guess is the point of their advice. If your objective is to be healthy enough to get a nice profitable IPO or buyout, but not healthy enough to survive past that, then it might be a great strategy.

Re:Foreshadowing?

[Anne Thwacks]

But the whole premise of Silicon Valley is that these ventures are basically Ponzi schemes, with a lottery like chance of success - but no penalty for the founder, of first or second round funders, because they get out with the big bucks and Joe public gets scammed - and who ever publicly admitted to being victim of a blatent scam - while investing someone else's money for a percentage of the losses.

Especially when the losers just write it off as tax deductible. Who cares if the business is viable if its filling your wallet? (Scamming people is the American Way - don't like it? you are un-American!)

In short, the real victims are the tax payers - everyone else involved wins enough to pay for at least half a dozen congress-critters.

Re:Foreshadowing?

[Livius]

wasn't blitzkrieg something that ultimately did well as a short term tactic but failed as part of a larger strategy

No, it succeeded as part of a larger strategy. That larger strategy, however, is a different matter.

Re:Foreshadowing?

[AHuxley]

That freedom to try, design, fail, try again is what makes the US great.
Vs the structures of a controlled Communist China and a tax collecting EU.
The tax, regulations and laws of a EU nations when trying to start a business, keep a business, grow a business.
Hire skilled people to work on merit? Hire a quota of below average workers under gov regulations. Due to the gov approval of starting the business?
That freedom allows the US to change to any new and emerging situation. To scale get ideas up. To fully and quickly recover from ideas that did not work.

China and the EU nations have no so such funding, legal and academic freedoms.
Workers stay with a company. The company once approved has to fit within a set of Communist or EU regulations and laws.
Reporting, tax and laws shape the company growth outside the USA.
The ability and skill is what sets the US investment apart and makes it great.

The freedom to invest, to win, to start again. To reinvent and to grow.
To be free of Communist control and direct EU taxation.
The freedom to find the best workers and create new products, services.

Re:Foreshadowing?

[rgmoore]

Ahm.. wasn't blitzkrieg something that ultimately did well as a short term tactic but failed as part of a larger strategy?

Not exactly. Blitzkrieg, or the tactics that led to it, were something that worked really well against enemies who didn't have the tactics and equipment to counter it. Once the enemy had the tactics, troops, and equipment to counter blitzkrieg, it became less and less capable of producing the kind of dramatic results it did early in the war. To a considerable extent, this worked to Germany's advantage; they were on the offense when blitzkrieg was effective and on the defense when it had lost its effectiveness. The problem Germany had in WWII wasn't with their tactics but with adopting war aims that were beyond their ability to achieve. It was always a mistake to go to war with the world's largest country and the world's richest country at the same time.

As far as the "enemies who don't have the tactics to counter it" part, I suspect we may already be past that point when it comes to VC trying to win monopolies. Everyone now knows that is the goal, and the competition is going to be trying the same stunt. At some level, the entrenched businesses that they're trying to supplant know it, too, and they're going to do everything in their power to slow the newcomers down. As an example, look at the political pushback existing taxi companies orchestrated against Uber and Lyft.

Re: Foreshadowing?

[Nidi62]

Blitzkrieg relies on speed and technological advantage to succeed, and succeed it did. However, the comparison is very apt because what did the Germans in wasnt the failure of blitzkrieg. It was the failure of leadership to adapt to changing circumstances and increasing innovation and improvement by the enemy. Basically, innovate or die. If you are sufficiently big enough inertia can carry you a long way, but die you eventually will.

The problem is we've let venture capitalists

[rsilvergun]

have too much money. So every time a competitor arises they just get bought out or buried.

Once you've got more money than you can spend that's not money anymore, it's power. Folks figured this out in the 50s, 60s and 70s and reigned it in with high taxes and a ton of Wall Street regulations. Then Reagan came along and shit all over that. Clinton didn't help either.

financial imbalance

[DogDude]

It comes down to the fact that we've got such a wild imbalance between the super wealthy and the regular people, that the super wealthy literally have nothing to invest in. They don't care about investing tons of money in unprofitable companies because, really, who cares if they lose money? They've got more money than they'll ever need. Why not just own a wildly unprofitable company so you can show off to your friends? Regular people (you and I) need our investments to actually earn money. I know that I only invest in profitable things. Real estate, profitable companies, etc.

Re:Premise is wrong.

[smoot123]

You believe they think a monopoly is even possible on ride hailing?

It's marxist dogma that all business people want and expect to get an eventual monopoly.

Is it possible? Sure, Lyft/Uber/Whoever just has to convince a legislature to grant them one. "We've decided to address the congestion issues in Manhattan by granting Uber an exclusive contract for ride-sharing services on the island (in exchange for letting us regulate their operations)." Been there, done that, bought the T-shirt.

Do you mean, could Uber or Lyft get an effective monopoly (that is, over X% of the drivers and/or riders, where X might be anywhere from 60 to 99)? That's where I think Tim glossed over the point. The whole point of blitzscaling is the network effect. He mentioned it at the top but kinda dropped it after that. You blitzscale because you think you're operating in a market with a network effect. Ride sharing seems like that. Any given driver can really only have one app open at a time. If more drivers have Uber open, Uber riders will have shorter pickup times, so more riders will check the Uber app first. If there are more Uber riders, drivers will have shorter delays between rides so they'll make more cash. If Uber and Lyft started with a 50.1%/49.9% market split, I'd expect Uber to eventually crush Lyft, even if the services were identical.

Think about it. You're leaving the bar and need a ride. Do you really want to check two apps to see which driver will do the better job? Or would you much rather check one app so you can get on with peeing/throwing up/getting jiggy with the hot babe you just picked up? Oh wait, this is Slashdot, nix that last option.

So yes, It's possible Uber could become the defacto monopoly, just like Microsoft has a defacto monopoly on desktop computing. Sure, there are other products but no one is bothering to compete with them on just the desktop any more. Apple, for instance, competes with the entire ecosystem of iDevices and iSoftware so it's not like the competing products is just iOS and Windows 10.

Regarding monopoly status, I'm sure every business person wants to dominate their market. "Dominate", for the companies I've worked for, means have something like 60% market share or greater. That's get-a-book-written-about-you territory. I don't think anyone thinks they have a realistic shot of a 90+% market share, any more than anyone thinks they have a realistic shot of playing in the National Hockey League. Sure, you can try but you really ought to have a plan B.

Given how much attention is showered on near monopolies, my guess is many CEOs would just as soon have 60% market share with a bunch of ankle-biter competitors. That gets you most of the money with many fewer headaches. Sore ankles, perhaps.

Uber valuation is insanity

[manu144x]

120 billions? :)) For a company with no profits, and with absolutely nothing proprietary that can't be replicated easily as long as you throw money at it to operate at a loss (like Uber does)?

Anybody that has a few hundred millions can come out with lower commissions, pump advertising like there's no tomorrow and people will jump immediately.

This is basically just people who lost a ton of money on Uber so far, and are now waiting to get out ASAP with other sucker's money. Hopefully at a profit, but if they can recoup anything they'll probably be very happy.

Re:Uber valuation is insanity

[TFlan91]

I'll call you an Uber for Fyre Festival

Re:Explain where the money evaporates ?? Please

[HornWumpus]

Uber has _16,000_ employees. To write and maintain a couple of apps and some infrastructure.

Never underestimate large company inefficiency. They are almost as bad as governments.

Not a New Problem

[Mr_Blank]

This rapid growth at all costs strategy is not new. The robber barons of the gilded age would literally kill the competition if given the chance. In more recent times Jack Welch, the CEO of GE from 1981 until 2001, was famous for his "#1 or #2" strategy.

Here is an excerpt from the 2003 article The Competitor: Jack Welch's Burning Platform:

Devising a Business Philosophy
In pursuit of growth, Welch wanted only those businesses that were number 1 or 2 in their markets in the GE portfolio.

As a result of this restructuring, the business could employ more aggressive tactics, such as in pricing, and have the resources to develop new products.

Without the Number 1, Number 2 strategy, Welch said, inflation would start to impede worldwide growth. There would be no room for a mediocre supplier of products and services. Successful companies in such a slow-growth environment would be those that searched out and participated in growth industries and insisted on being number 1 or number 2 in every business they were in. They would need to be the number 1 or number 2 leanest, lowest cost, worldwide producers of quality goods and services, or they would have to have a definite technological edge in some market.

He downsized the GE payroll, ending the “no layoff” policy that had characterized the company and many other large U.S. firms. He sold $12-billion worth of businesses and purchased $26-billion worth of others. And, he pared GE’s workforce from 412,000 to a mere 229,000.

To Welch, keeping people in place who contributed little or nothing to the company represented a failed strategy. It was a major reason why a company under-performed. GE’s key competition in the early 1980s was coming from overseas enterprises that paid their employees less and achieved higher productivity rates. To compete successfully with such companies, GE had to upgrade equipment and cut employee rolls.

Network effect

[BankRobberMBA]

Actually most rideshare drivers have both the Uber and Lyft apps running at the same time. When they accept a ping on one app they set the other to offline until the ride is complete so they can protect their acceptance rate. There is actually another app, called Mystro, that manages this process for you. It also allows the driver to set various preferences and automatically prioritize certain rides over others. Mystro is supposedly working to incorporate other gig services like Door Dash, Postmates, and Uber Eats.

Re:Explain where the money evaporates ?? Please

[zlives]

welcome to blitzscaling, or as we used to call it in the olden times, throwing money at a problem.