- July 28, 2022
- Posted by: Ramkumar
- Category: Posts
Blitzscaling and Other Growth Strategies
In the last few days, i have read articles that lament the failure of startups like Zomato/ Paytm and why their business model of burning cash is disastrous for the startup ecosystem and its employees. Living in Bangalore means you have access to entrepreneurs and VC firms. Thus, you can understand their thought process. While speaking to a senior partner at a VC firm over the weekend, who invested earlier in Amazon and Meta, his thoughts on investing capital in any startup are as follows:
𝐂𝐥𝐚𝐬𝐬𝐢𝐜𝐚𝐥 𝐆𝐫𝐨𝐰𝐭𝐡 𝐌𝐨𝐝𝐞𝐥: Here, the value of future growth gets determined by the positive NPV projects that the firm takes; thus, the hurdle rate becomes crucial in assessing the firm’s ROIC. This strategy works when a firm looks to maximize its returns in an established stable market. A classic example is the current strategy of Microsoft and Google.
𝐅𝐚𝐬𝐭 𝐒𝐜𝐚𝐥𝐢𝐧𝐠: Here, the startup focuses on growth at the cost of profitability as it wants to seize market share. However, the startup focuses on a stable market. Thus the startup costs are predictable. A classic example is Tesla which looks to scale in a stable market like Automotive.
𝐁𝐥𝐢𝐭𝐳𝐬𝐜𝐚𝐥𝐢𝐧𝐠: Here, neither the market is stable, and the startup focuses on growth at the expense of margins. Thus, the TAM becomes crucial, and to raise funding, VCs look at the #TAM rather than the firm. Here, access to capital is vital because the firms will make many mistakes that can burn cash. However, the VC firms are ready to gamble because the rewards are higher when they win. Thus for them, this strategy becomes optimal when raising capital is cheap.
Thus, when a VC firm decides to invest in a startup, they first identify firms with a product-market fit that grows through the classical growth model. After the investment, VC firms pump capital and Blitzscale so that the firms gain market share. They then change the strategy to Fast scaling; as the business matures, its strategy shifts to the classical growth model once the firm becomes a market leader.
The VC firms have extended this process to individual products/services. Thus a firm like Google may have a portfolio of services that follow classical growth, fast scaling, and Blitzscaling.
Thus, I believe VCs understand precisely the type of investments they get into and the risks they face. So their investments are a portfolio of firms with a classical growth model to Blitzscaling.