This philosophy has turned venture capitalists into movie studios, financing hundreds of companies in pursuit of the mega-hit that will make their fund, and at its worst turns entrepreneurs into the equivalent of Hollywood actors, moving from one disposable movie to another. (“The Uber of Parking” is sure to be a hit! And how about “the Uber of Dry Cleaning”?)

The losses from the blitzscaling mentality are felt not just by entrepreneurs but by society more broadly. When the traditional venture-capital wisdom is to shutter companies that aren’t achieving hypergrowth, businesses that would once have made meaningful contributions to our economy are not funded, or are starved of further investment once it is clear that they no longer have a hope of becoming a home run.

Winners-take-all is an investment philosophy perfectly suited for our age of inequality and economic fragility, where a few get enormously rich, and the rest get nothing. In a balanced economy, there are opportunities for success at all scales, from the very small, through successful mid-size companies, to the great platforms.

Is Glengarry Glen Ross’s sales competition really the economy we aspire to?

There is another way

There are business models, even in the technology sector, where cash flow from operations can fund the company, not venture capitalists gripping horse-race tickets.

Consider these companies: Mailchimp, funded by $490 million in annual revenue from its 12 million customers, profitable from day one without a penny of venture capital; Atlassian, bootstrapped for eight years before raising capital in 2010 after it had reached nearly $75 million in self-funded annual revenue; and Shutterstock, which took in venture capital only after it had already bootstrapped its way to becoming the largest subscription-based stock photo agency in the world. (In the case of both Atlassian and Shutterstock, outside financing was a step toward liquidity through a public offering, rather than strictly necessary to fund company growth.) All of these companies made their millions through consumer-focused products and patience, not blitzscaling.

Jason Fried and David Heinemeier Hansson, the founders of Basecamp, a 20-year-old, privately held, profitable Chicago company whose core product is used by millions of software developers, have gone even further: They entirely abandoned the growth imperative, shedding even successful products to keep their company under 50 people. Their book about their approach, It Doesn’t Have to Be Crazy At Work, should be read as an essential counterpoint to Blitzscaling.

Another story of self-funded growth I particularly like is far from tech. RxBar, a Chicago-based nutrition bar company with $130 million of self-funded annual revenue, was acquired last year by Kellogg for $600 million. Peter Rahal, one of the two founders, recalls that he and co-founder Jared Smith were in his parents’ kitchen, discussing how they would go about raising capital to start their business. His immigrant father said something like, “You guys need to shut the fuck up and just sell a thousand bars.”

And that’s exactly what they did, putting in $5,000 each, and hustling to sell their bars via Crossfit gyms. It was that hustle and bias toward customers, rather than outside funding, that got them their win. Their next breakthrough was in their distinctive “No BS” packaging, which made the ingredients, rather than extravagant claims about them, the centerpiece of the message.

The exit for RxBar, when it came, was not the objective, but a strategy for growing a business that was already working. “Jared and I never designed the business to sell it; we designed it to solve a problem for customers,” Rahal recalled. “In January 2017, Jared and I were sitting around and asked what do we want to do with this business? Do we want to continue and make it a family business? Or do we want to roll it up into a greater company, really scale this thing and take it to the next level? We wanted to go put fire on this thing.”

They could have raised growth capital at that point, like Mike Cannon-Brooks of Atlassian or Jon Oringer of Shutterstock did, but acquisition provided a better path to sustainable impact. Kellogg brought them not just an exit, but additional capabilities to grow their business. Rahal continues to lead the brand at Kellogg, still focusing on customers.

Raise less, own more

The fact that the Silicon Valley blitzscaling model is not suited for many otherwise promising companies has led a number of venture capitalists, including my partner Bryce Roberts at OATV, to develop an approach for finding, inspiring, and financing cash-flow positive companies.

Indie.vc, a project at OATV, has developed a new kind of venture financing instrument. It’s a convertible loan that is designed to be repaid out of operating cash flow rather than via an exit, but that can convert to equity if the company, having established that there is a traditional venture business opportunity, decides to go that route. This optionality effectively takes away the pressure for companies to raise ever more money in pursuit of the hypergrowth that, as Hoffman and Yeh noted, traditional venture capitalists are looking for. The program also includes a year of mentorship and networking, providing access to experienced entrepreneurs and experts in various aspects of growing a business.

In the Indie.vc FAQ, Bryce wrote:

“We believe deeply that there are hundreds, even thousands, of businesses that could be thriving, at scale, if they focused on revenue growth over raising another round of funding. On average, the companies we’ve backed have increased revenues over 100% in the first 12 months of the program and around 300% after 24 months post-investment. We aim to be the last investment our founders NEED to take. We call this Permissionless Entrepreneurship.”

This is a bit like the baseball scouting revolution that Michael Lewis chronicled in Moneyball. While all the other teams were looking for home-run hitters, Oakland A’s manager Billy Beane realized that on-base percentage was a far more important statistic for actually winning. He took that insight all the way from the league basement to the playoffs, winning against far richer teams despite the A’s own low-salary budget.

One result of an investment model looking for the equivalent of on-base percentage—that is, the ability to deliver a sustainable business for as little money as possible—is that many entrepreneurs can do far better than they can in the VC blitzscale model. They can build a business that they love, like I did, and continue to operate it for many years. If they do decide to exit, they will own far more of the proceeds.

Even successful swing-for-the fences VCs like Bill Gurley of Benchmark Capital agree. As Gurley, an early Uber investor and board member, tweeted recently:

Indie.vc’s search for profit-seeking rather than exit-seeking companies has also led to a far more diverse venture portfolio, with more than half of the companies led by women and 20% by people of color. (This is in stark contrast to traditional venture capital, where 98% of venture dollars go to men.) Many are from outside the Bay Area or other traditional venture hotbeds.The 2019 Indie.vc tour, in which Roberts looks for startups to join the program, hosts stops in Kansas City, Boise, Detroit, Denver, and Salt Lake City, as well as the obligatory San Francisco, Seattle, New York, and Boston.

Where conventional startup wisdom would suggest that aiming for profits, not rounds of funding, will lead to plodding growth, many of our Indie.vc companies are growing just as fast as those from the early-stage portfolios in our previous OATV funds.

Nice Healthcare is a good example. Its founder, Thompson Aderinkomi, had been down the traditional blitzscaling path with his prior venture, and wanted to take a decidedly different approach to funding and scaling his new business. Seven months post-investment by Indie.vc, Nice was able to achieve 400% revenue growth, over $1 million in annual recurring revenue, and is now profitable. All while being run by a black founder in Minneapolis. Now that’s a real unicorn! Some of the other fast-growing companies in the Indie.VC portfolio include The Shade Room, Fohr, Storq, re:3d, and Chopshop.

OATV has invested in its share of companies that have gone on to raise massive amounts of capital—Foursquare, Planet, Fastly, Acquia, Signal Sciences, Figma, and Devoted Health for example—but we’ve also funded companies that were geared toward steady growth, profitability, and positive cash flow from operations, like Instructables, SeeClickFix, PeerJ, and OpenSignal. In our earlier funds, though, we were trying to shoehorn these companies into a traditional venture model when what we really needed was a new approach to financing. So many VCs throw companies like these away when they discover they aren’t going to hit the hockey stick. But Roberts kept working on the problem, and now his approach to venture capital is turning into a movement.

A recent New York Times article, “More Start-Ups Have an Unfamiliar Message for Venture Capitalists: Get Lost,” describes a new crop of venture funds with a philosophy similar to Indie.vc. Some entrepreneurs who were funded using the old model are even buying out their investors using debt, like video-hosting company Wistia, or their own profits, like social media management company Buffer.

Sweet Labs, one of OATV’s early portfolio companies, has done the same. With revenues in the high tens of millions, the founders asked themselves why they should pursue risky hypergrowth when they already had a great business they loved and that already had enough profit to make them rich. They offered to buy out their investors at a reasonable multiple of their investment, and the investors agreed, giving back control over the company to its founders and employees. What Indie.vc has done is to build in this optionality from the beginning, reminding founders that an all-or-nothing venture blitzscale is not their only option.

The responsibility of the winners

I’ve talked so far mainly about the investment distortions that blitzscaling introduces. But there is another point that I wish Hoffman and Yeh had made in their book.

Assume for a moment that blitzscaling is indeed a recipe for companies to achieve the kind of market dominance that has been achieved by Apple, Amazon, Facebook, Microsoft, and Google. Assume that technology is often a winner-takes-all market, and that blitzscaling is indeed a powerful tool in the arsenal of those in pursuit of the win.

What is the responsibility of the winners? And what happens to those who don’t win?

We live in a global, hyperconnected world. There is incredible value to companies that operate at massive scale. But those companies have responsibilities that go with that scale, and one of those responsibilities is to provide an environment in which other, smaller companies and individuals can thrive. Whether they got there by blitzscaling or other means, many of the internet giants are platforms, something for others to build on top of. Bill Gates put it well in a conversation with Chamath Palihapitiya when Palihapitiya was the head of platform at Facebook: “A platform is when the economic value of everybody that uses it exceeds the value of the company that creates it.”

The problem with the blitzscaling mentality is that a corporate DNA of perpetual, rivalrous, winner-takes-all growth is fundamentally incompatible with the responsibilities of a platform. Too often, once its hyper-growth period slows, the platform begins to compete with its suppliers and its customers. Gates himself faced (and failed) this moral crisis when Microsoft became the dominant platform of the personal computer era. Google is now facing this same moral crisis, and also failing.

Windows, the web, and smartphones such as the iPhone succeeded as platforms because a critical mass of third-party application developers added value far beyond what a single company, however large, could provide by itself. Nokia and Microsoft were also-rans in the smartphone platform race not just because they couldn’t get customers to buy their phones, but because they couldn’t get enough developers to build applications for them. Likewise, Uber and Lyft need enough drivers to pick people up within a few minutes, wherever they are and whenever they want a ride, and enough passengers to keep all their drivers busy. Google search and Amazon commerce succeed because of all that they help us find or buy from others. Platforms are two-sided marketplaces that have to achieve critical mass on both the buyer and the seller side.

Yet despite the wisdom Gates expressed in his comments to Palihapitiya about the limitations of Facebook as a platform, he clearly didn’t go far enough in understanding the obligations of a platform owner back when he was Microsoft’s CEO.

Microsoft was founded in 1975, and its operating systems —first MS-DOS, and then Windows—became the platform for a burgeoning personal computer industry, supporting hundreds of PC hardware companies and thousands of software companies. Yet one by one, the most lucrative application categories—word processing, spreadsheets, databases, presentation software—came to be dominated by Microsoft itself.

One by one, the once-promising companies of the PC era—Micropro, Ashton-Tate, Lotus, Borland—went bankrupt or were acquired at bargain-basement prices. Developers, no longer able to see opportunity in the personal computer, shifted their attention to the internet and to open-source projects like Linux, Apache, and Mozilla. Having destroyed all its commercial competition, Microsoft sowed the dragon’s teeth, raising up a new generation of developers who gave away their work for free, and who enabled the creation of new kinds of business models outside Microsoft’s closed domain.

The government also took notice. When Microsoft moved to crush Netscape, the darling of the new internet industry, by shipping a free browser as part of its operating system, it had gone too far. In 1994, Microsoft was sued by the US Department of Justice, signed a consent decree that didn’t hold, and was sued again in 1998 for engaging in anti-competitive practices. A final settlement in 2001 gave enough breathing room to the giants of the next era, most notably Google and Amazon, to find their footing outside Microsoft’s shadow.

That story is now repeating itself. I recently did an analysis of Google’s public filings since its 2004 IPO. One of the things those filings report is the share of the ad business that comes from ads on Google’s own properties (Google Ads) versus from ads that it places on its partner sites (AdSense). While Google has continued to grow the business for its partners, the company has grown its own share of the market far, far faster. As shown on the chart below, when Google went public in 2004, 51% of ad revenue came from Google’s own search engine while 49% came from ads on third-party websites served up by Google. But by 2017, revenue from Google properties was up to 82%, with only 18% coming from ads on third-party websites.

Where once advertising was relegated to a second-class position on Google search pages, it now occupies the best real estate. Ads are bigger, they now appear above organic results rather than off to the side, and there are more of them included with each search. Even worse, organic clicks are actually disappearing. In category after category––local search, weather, flights, sports, hotels, notable people, brands and companies, dictionary and thesaurus, movies and TV, concerts, jobs, the best products, stock prices, and more––Google no longer sends people to other sites: It provides the information they are looking for directly in Google. This is very convenient for Google’s users, and very lucrative for Google, but very bad for the long-term economic health of the web.

In a recent talk, SEO expert Rand Fishkin gave vivid examples of the replacement of organic search traffic with “no click” searches (especially on mobile) as Google has shifted from providing links to websites to providing complete answers on the search page itself. Fishkin’s statistical view is even more alarming than his anecdotal evidence. He claims that in February 2016, 58% of Google searches on mobile resulted in organic clicks, and 41% had no clicks. (Some of these may have been abandoned searches, but most are likely satisfied directly in the Google search results.) By February 2018, the number of organic clicks had dropped to 39%, and the number of no click searches had risen to 61%. It isn’t clear what proportion of Google searches his data represents, but it suggests that the cannibalization is accelerating.

Google might defend itself by saying that providing information directly in its search results is better for users, especially on mobile devices with much more limited screen real estate. But search is a two-sided marketplace, and Google, now effectively the marketplace owner, needs to look after both sides of the market, not just its users and itself. If Google is not sending traffic to its information suppliers, should it be paying them for their content?

The health of its supplier ecosystem should be of paramount concern for Google. Not only has the company now drawn the same kind of antitrust scrutiny that once dogged Microsoft, it has weakened its own business with a self-inflicted wound that will fester over the long term. As content providers on the web get less traffic and less revenue, they will have fewer resources to produce the content that Google now abstracts into its rich snippets. This will lead to a death spiral in the content ecosystem on which Google depends, much as Microsoft’s extractive dominion over PC software left few companies to develop innovative new applications for the platform.

In his book Hit Refresh, Satya Nadella, Microsoft’s current CEO, reflected on the wrong turn his company had taken:

“When I became CEO, I sensed we had forgotten how our talent for partnerships was a key to what made us great. Success caused people to unlearn the habits that made them successful in the first place.”

I asked Nadella to expand on this thought on an interview I did with him in April 2017:

“The creation myth of Microsoft is what should inspire us,” he said. “One of the first things the company did, when Bill and Paul got together, is that they built the BASIC interpreter for the ALTAIR. What does that tell us today, in 2017? It tells us that we should build technology so that others can build technology. And in a world which is going to be shaped by technology, in every part of the world, in every sector of the economy, that’s a great mission to have. And, so, I like that, that sense of purpose, that we create technology so that others could create more technology.”

Now that they’ve gone back to enabling others, Microsoft is on a tear.

We might ask a similar question: What was the creation myth of Google? In 1998, Larry Page and Sergey Brin set out to “organize the world’s information and make it universally accessible and useful.” Paraphrasing Nadella, what does that tell us today, in 2019? It tells us that Google should build services that help others to create the information that Google can then organize, make accessible, and make more useful. That’s a mission worth blitzscaling for.

Google is now 20 years old. One reason for its extractive behavior is that it is being told (now by Wall Street rather than venture investors) that it is imperative to keep growing. But the greenfield opportunity has gone, and the easiest source of continued growth is cannibalization of the ecosystem of content suppliers that Google was originally created to give users better access to. Growth for growth’s sake seems to have replaced the mission that made Google great.

The true path to prosperity

Let’s circle back to Uber and Lyft as they approach their IPOs. Travis Kalanick and Garrett Camp, the founders of Uber, are serial entrepreneurs who set out to get rich. 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.

This they can do only by convincing the market that their money-losing businesses will be far better in the future than they are today. Their race to monopoly has ended up instead 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. If it were just these two companies, it would be bad enough. But it isn’t. Our entire economy seems to have forgotten that workers are also consumers, and suppliers are also customers. When companies use automation to put people out of work, they can no longer afford to be consumers; when platforms extract all the value and leave none for their suppliers, they are undermining their own long-term prospects. It’s two-sided markets all the way down.

The goal for Lyft and Uber—and for all the entrepreneurs being urged to blitzscale—should be to make their companies more sustainable, not just more explosive; more equitable, not more extractive.

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.

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