
The fundamental problem with Silicon Valley’s favorite growth strategy - tsechin
https://qz.com/1540608/the-problem-with-silicon-valleys-obsession-with-blitzscaling-growth/
======
Animats
_" blitzscaling isn’t really a recipe for success but rather survivorship bias
masquerading as a strategy."_

That says it all. Really, that's how YC works - fail fast and cheap, profit
from the survivors. Great for VCs, not so much for the cannon fodder.

 _" We have reserves."_

~~~
ghobs91
That's better than a tech landscape with no access to venture capital at all,
and startups taking 10x longer to reach critical mass, if they even do.

There's a reason why the US tech industry is orders of magnitude larger than
the rest of the world, access to capital. Go try to grow a startup in Europe
with its risk averse investors, and see how far you get.

You'll start to see this effect even more in the biotech space, where up front
access to capital is crucial in developing and testing products/medicines that
must go through expensive FDA approval.

~~~
mdorazio
I'm not convinced that access to capital is the sole, or even primary, reason
the US tech industry is much stronger than elsewhere. There are many factors
like entrepreneurial culture, low corruption, and established/concentrated
support infrastructure that seem a lot more important.

~~~
adventured
It's one of the two or three biggest reasons, and definitely not the sole
reason. The modern system of industrial-scale venture capital available in the
US - going back widely four plus decades - is rivaled only by China in the
last decade. More broadly that culture of risk capital spans every tier, from
the smallest angels to the biggest VC firms. The comprehensive nature of it is
exceedingly rare among nations. It's also now a very old phenomenon in the US,
going back to the earliest days of the industrial revolution (everyone from
Tesla to Edison to Ford were financed by what was essentially venture
capital).

Most of developed Europe, except for a few nations, scores well on having low
corruption, comparable to or better than the US. Western Europe also widely
has a strong social safety net that should be encouraging to entrepreneurs
from a life-risk perspective (which may actually result in the exact opposite
outcome: a culture of lower risk taking; the culture that will install the
world's most elaborate social safety systems, is more likely to be one that
aggressively dislikes risk-taking). While only a few small nations in Europe
are as wealthy as the US, several more are close enough that the difference
shouldn't matter. The problem is that capital is overwhelmingly unwilling to
participate in venture investing.

The US not-so-secret sauce is: easy access to risk capital + a culture that
has historically strongly encouraged entrepreneurial activity + a massive
single market with one core language (that is also conveniently the global
language of business, media and culture) + reasonable taxation and regulation
policies + strong protection of property rights + ease of market access (low
tariffs, low trade barriers, a foreigner can easily start/own a US business
from almost anywhere) + very welcoming to foreign capital (few capital
controls) + an enormous lead coming out of WW2 (which helped the US be the
first to the tech epoch, which has buffered its lead ever since) + the global
reserve currency + a massive traditional financial system (great for IPOs,
stocks, acquisitions, leverage, etc. - it's why Alibaba is on the NYSE) + 19
of the top 20 universities on earth, and four or five dozen more that are
world-class + a very successful university meets business development system
(which has helped incubate countless new leading companies and technologies) +
inexpensive energy + half a century of built-up knowledge, experience,
specialization in every tech segment + a long history of immigration policies
that allow people to come to the US and pursue their dreams (Japan and China,
the #2 and #3 economies, have overwhelmingly shunned foreigners becoming
citizens by comparison; the US tech industry wouldn't be anything remotely
close to what it is today without the Andy Groves, Nadellas, Elon Musks,
Jensen Huangs or Collisons).

That's the short list. It can't be replicated.

~~~
YorkshireSeason
Nice list, I agree with it, but I don't think it can be the full story.

Why? None of the above are specific to software, if the above was the full
story, why would the US not also dominate the world in e.g. Autos, Chemistry,
Electronics, Batteries etc? There must be other factors. Maybe first-mover
advantage, maybe software benefits more from centralisation, from economies of
scale than other industries? Other suggestions?

------
new_here
I’ve read and listened to quite a bit of stuff from Reid Hoffman (Masters of
Scale, LinkedIn’s pitch deck etc) and have never found him or any of his
advice particularly convincing.

Maybe I’m speculating wildly here but it feels like the main thing that made
LinkedIn successful was that it was a first mover in the business social
network space that used every dark pattern and email notification they could
conceive of at a time when users were less cautious about their privacy. Now
they have their moat and defend it with every trick they have. Their social
auth API provides watermarked profile pics and they drop attributes without
any notice.

If that’s the way you want to do it, I guess that’s your choice. But the
professional social networking space could seriously use a breath of fresh
air.

~~~
ardit33
If everything was "just timing and luck", then we would be using friendster,
myspace, ICQ, AOL Chat, and bebo today, instead of
facebook/twitter/instagram/snapchat/linkedin

There is something more than that, and good execution is crucial, and it is
good to know on what worked well, and what didn't work out for both the
current winners and past losers.

I think Reid has good things to say about what worked for them back than, and
take it like that.

There is no rulebook on startups, as all of them have different patterns, but
reading on what worked 2003-2010 (pre-mobile times), is not going to hurt
anyone.

Dismissing the success as just being merely 'dark patterns' \+ timing, seems a
bit short sighted.

~~~
alkibiades
you proved that not everything is just timing and luck but you didn’t prove
that nothing is. The difference between it and myspace is something so much
better than it came out that is surpassed the network effect. while there
isn’t really anything compelling to replace linkedin in its base feature set
that it started with.

------
chubot
As someone who's lived and worked in the Bay Area for 16+ years, this is a
fantastic article. It's just spot on in its characterization of the old and
new Microsoft, the old and new Google, Lyft/Uber, and many other companies.

I worry that many won't read it because it's so long.

Now I need to go look up everything else Tim O'Reilly has written. He is a
wise man. I of course know who he is -- mainly through books and conferences I
suppose -- but I didn't know about his other experience in business.

It's interesting that in the early days of the web he started a Yahoo-like
company before Yahoo and sold it to AOL, and a Windows web server company that
competed with Netscape.

------
l3robot
On Monopoly: It has been a though I have for some time. I wonder how could
they not form monopolies. Who has 4-5 taxi apps on their phone? Who has 2-3
social profiles? Who has the habits of jumping from a searching engine to
another? A minority. Their product are _almost_ natural monopolies.

They are very difficult to fight against monopolies because when they have
user commitment, the need for the product is filled entirely by one company.
In addition, it is very difficult to make the user change, it's part of a
habbit.

I might be wrong there. Just a though I had, but interesting to discuss. Is it
really possible to avoid monopoly with these products?

~~~
moosey
There are a number of options, and not all of them are splitting the company
into a bunch of fully co-equal units, which is a process that works better
when things cover an area.

In telecom, it was typical, due to regulation, that you'd have different parts
of the business that couldn't interact at all. I wasn't permitted to talk to
people with certain badges because of their business unit. You could easily do
this with the advertising business for each of these large companies, or split
it off entirely, and force that ad exchange to work with their competitors,
for instance. You could regulate the news feed so that the pipe was a lot
dumber and configurable, so that the company would no longer be allowed to
experiment on human psyches.

There are tons of options that don't result in breaking facebook into 12
facebooks. Pulling the advertising out, and regulating advertising in general,
is the best solution I've been able to spitball though.

~~~
l3robot
Interesting points

------
adz_6891
> what is happening today is that the market has almost entirely turned into a
> betting machine. Not only that, it’s a machine for betting on a horse race
> in which it’s possible to cash your winning ticket long before the race has
> actually finished. In the past, entrepreneurs got rich when their companies
> succeeded and were able to sell shares to the public markets. Increasingly,
> though, investors are allowing insiders to sell their stock much earlier
> than that. And even when companies do reach the point of a public offering,
> these days, many of them still have no profits. According to University of
> Florida finance professor Jay Ritter, 76% of all IPOs in 2017 were for
> companies with no profits. By October 2018, the percentage was 83%,
> exceeding even the 81% seen right before the dotcom bust in 2000.

I thought the end of the article had some of the most interesting content.
Amazing how many companies IPO without being profitable!

------
BoiledCabbage
This is an absolutely incredible article. Possibly the best I've seen on HN in
6mo to a year.

Normally I wouldn't post a comment just to say that but the amount of true
insight ORiley provides is impressive.

Understating of the web, of SV of business, of growth of IPOs and well
reasoned analysis and predictions of what's coming next in funding.

It is long and absolutely worth the read.

------
mark_l_watson
I know a few people who became very wealthy by starting companies or
businesses but entrepreneurship is not the only path to success.

IMO, the world is better off with a good mix of long shot bets to build large
scale businesses and also many people being very happy to run solo or small
businesses providing services or selling products on a small scale.

I am sometimes critical of Google, FB, Microsoft, and Amazon - sometimes they
deserve criticism - but except for FB all of these companies also enrich my
life and I am happy they are in business.

I am also happy personally to have been a consultant, very well paid wage
slave for large companies, and have a small business as an author and
sometimes selling niche AI software products. I never got very rich, but I
have usually just worked 25 to 32 hours a week, with several times in my life
taking many years of mostly leisure time.

There are many ways to be successful in life - choose wisely!

~~~
ackbar03
What kind of niche ai products do you work with? Curious to know if your ok to
share

~~~
mark_l_watson
A natural language processing toolkit that I wrote in Common Lisp about 15
years ago and converted to Ruby about 10 years ago. A simplified version in
Haskell is in my Haskell book and a simpler version is also in my Common Lisp
book - all the book code is on github [https://github.com/mark-
watson?tab=repositories](https://github.com/mark-watson?tab=repositories)

------
thebokehwokeh2
The fundamental problem with capitalism (not just in silicon valley) is that
access to capital is what defines winners and losers. Of course I'm being
simplistic and there will always be underdog stories, but the reason any
company becomes as big as it is, is capital, plain and simple.

The immediate effect of gaining massive capital is tremendous. Outcompeting
for both workers as well as getting to market sooner is an obvious benefit.
The ability to lobby in government against potential roadblocks of whatever it
is that you're doing is another. Just from the word itself, capitalism is
rigged for those with capital.

Further down the line though, you are now beholden to this immediate level of
investment, and as this article shows, this is where problems arise.

~~~
jiveturkey
> The fundamental problem with capitalism (not just in silicon valley) is that
> access to capital is what defines winners and losers.

Well yeah, it's fundamental because that's the definition! So it's not a
_problem_. Capitalism works as designed.

~~~
hannasanarion
Working as designed is not the same as working as intended or working well.

------
trhway
>Would incumbent transportation companies have had more time to catch up,
leading to a more competitive market?

i'm not sure that in general incumbents catching up leads to increased
competition, i think it leads instead to the incumbents protecting their
position and using it to stop the innovation and the resulting threat of
disruption.

In case of Uber it wasn't about incumbents per.se., it was about regulators.
The blitzkrieg allowed to crush regulators and thus increase competition by
adding "ridesharing" into the mix.

Similar thing of using your huge weight to crush a chokehold on the industry
happened when Jobs took control over phone apps away from the telecom
companies.

------
zby
The craziness of recent Uber and WeWork and other unicorn valuations (with
SoftBank just doubling their bets to show valuation growth) looks like a peak
in the investment euphoria and what we should expect next is a swing back ala
[https://www.oaktreecapital.com/docs/default-
source/memos/200...](https://www.oaktreecapital.com/docs/default-
source/memos/2004-07-21-the-happy-medium.pdf?sfvrsn=2)

This article adds to that notion.

------
PhasmaFelis
I read the headline and thought "Step 1 collect users, step 3 profit," and
yep, that's it.

> _their enormous valuations are based on the premise that if a company grows
> big enough and fast enough, profits will eventually follow._

------
nostrademons
There's a broader historical perspective that's missing in this article.

The Second Industrial Revolution (1870-1914) was much like today. You had
extremely rapid growth of new industries fueled by widespread availability of
capital; a pervasive bubble economy punctuated by massive stock market panics
& depressions; rapid development of new technologies; widespread fraud &
corruption; a feeling that the common man was missing out on these
developments (hence the term "The Gilded Age", a reference to it being shiny
on the surface but dull & black inside); a widespread populist movement;
political discontent; and globalization. And these technologies proceeded in
overlapping waves: ironclads were replaced by steel ships; steel made steam
engines possible; steam paddleboats replaced sailing clipper ships; propellers
replaced paddles; steam turbines replaced triple-expansion engines; oil
replaced coal in boilers. It was not uncommon for a ship to become obsolete
before she entered service in the early 1900s.

The effect of the mass availability of capital during this time period (other
than in destabilizing society) was to dramatically increase the rate of
adoption of these new technologies. Without the massive capital influx into
railroads, it's doubtful that there'd be enough of a market to drive
widespread adoption of the Bessemer process, which made steel cheap enough to
use in ships & skyscrapers. Without the mass capital investment in shipping,
it's doubtful that there'd be an impetus to develop & perfect the steam
turbine or switch from coal to oil as a fuel. Without demand first from the
kerosene lighting industry and then from the shipping industry, it's doubtful
that there would be gasoline (then a waste byproduct of petroleum refining) to
fuel the automobile industry.

Similarly, O'Reilly's looking at Uber and Lyft at this snapshot in time and
lamenting that their market power is preventing new ridesharing companies from
entering. But the point is not to perfect ridesharing; it's to replace it.
Uber and Lyft are arguably already obsolete, with Waymo in active testing in
Arizona and California, and will be replaced shortly by self-driving cars.
It's doubtful that self-driving cars are the endgame either; I suspect that
we'll see intermodal transportation pods that move people & cargo through and
between cities automatically.

The point of massive capital investment is to get us to the future faster.
It'll be wrenching and cause massive societal dislocation - the first
industrial revolution gave us wars of nationalism for the US/Italy/Germany,
and the second gave us 2 world wars, the fall of centuries-old dynasties,
Communist revolutions, and eventually the Holocaust. But we don't really have
a choice.

~~~
Erazal
I agree with you on the effect of massive capital investment : bringing us the
future faster ; at the cost of social turmoils. However the necessity of going
through those turmoils is false : why don't we really have a choice ?

~~~
nostrademons
Because somebody else is will get there first and then _inflict_ those
turmoils first, on their terms.

This looks different at different scales. On an individual level, it's being
passed over for promotion because the blowhard in the next cube has this great
idea for how to apply deep learning, or losing out on a job to the college kid
who's up-to-date in Solidity and React while you still work in VB.NET and SQL
Server. On a company level, it's going bankrupt because some new startup
offers critical new features at 1/10th the price. On a societal level, it's
being conquered by other societies that have adopted the new technologies at
the cost of the social turmoil and then choose to inflict it upon you. Each
attempt to stop the turmoil by fiat just escalates it up a level: if you
declare you're never laying people off, your company goes bankrupt, while if
you declare that nobody is allowed to innovate your society collapses. (Either
from within, where your people look at the technologies other societies enjoy
and say "We want that", or from outside, where an invading army lands on your
shores and kills you all.)

Americans are particularly blind to this dynamic on the societal level because
we're usually the ones inflicting it upon others. "Manifest destiny" was all
about inflicting progress upon the Native Americans who didn't want it, while
the Cold War & fight against Communism was about a richer, more powerful
empire inflicting the way of life that made us richer & more powerful at the
expense of social stability on stagnant, poorer, but in-theory more
egalitarian and stable societies.

~~~
johnvanatta
Some of that is happening in the US right now. Dense (mostly coastal) cities;
built on clustering effects, immigration, and highly skilled workers; are
thriving. That model is working, but it brings with it high pay disparities
and disruption of outdated social structures and values. Whereas the older
model of geographically disbursed industrialism, which peaked in the 60's or
70's, is faltering.

How does that manifest politically? Look no further than Trump:

[https://hbr.org/2016/11/what-so-many-people-dont-get-
about-t...](https://hbr.org/2016/11/what-so-many-people-dont-get-about-the-u-
s-working-class)

His entire candidacy was about "owning the libs" and their globalist, diverse,
cosmopolitan world. A backlash against socioeconomic change, with very real
consequences.

~~~
nostrademons
Yup. The "two economies; two moneys" divide between urban coastal America &
the Rust Belt / Deep South is probably one of the greatest silent threats to
American security. Historically nation-states do not survive divides in
regional inequality that are this big or this entrenched; the temptation grows
for the rich region to secede and engage more with the global economy, while
the resentment from the poor region builds and can lead to outright violence.
And America's biggest defensive weapon, historically, has been two oceans:
this doesn't apply when the potential enemies share a continent.

~~~
anongraddebt
Happening in other developed countries as well. Mega-cities and urban coastal
corridors are globalizing faster than the nation-states to which they are
legally subsumed under. Cities are beginning to test the boundaries of their
prescribed sovereignty in trade and other matters.

~~~
johnvanatta
London and Brexit immediately come to mind!

