'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

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?

[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.

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.

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.