Small Before Big

Ideas too often get killed for seeming too small. This is a shame. In the knowledge economy, small can get big very fast. Many creators of consequence share a quality in common: they aren’t afraid to start by bringing value to just a few people. On the other hand, those who need the adulation of multitudes early in their journey often fail.

Imagine a fledgling musician, dropping their first cut. If thousands don’t listen, should they give up or should they record a new song? I believe the artists who succeed in growing an audience have 3 qualities: 1) a love of craft so deep, they’d make music even if nobody listened, 2) just enough care for how their music is received such that they respond and change without becoming just like everybody else, and 3) they are sonically interesting without being unintelligibly beyond what people are ready for.

Siren Song of the Big Market

If your idea requires outside financing, you’ll be asked to share how large your target market is. Naïve investors will often rule out a business in its infancy if they can’t understand how it’ll grow to dominate an existing market. These investors miss out on the truly revolutionary ideas that make markets, ideas like cloud computing, solid-state storage, crypto currency, electric vehicles, mobile computing, etc. The quality that unites all market-changing businesses is at first they came from the margins and seemed like jokes. This observation isn’t new, of course, it’s straight from the late Clayton M. Christensen’s The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail:

“First, disruptive products are simpler and cheaper; they generally promise lower margins, not greater profits. Second, disruptive technologies typically are first commercialized in emerging or insignificant markets. And third, leading firms’ most profitable customers generally don’t want, and indeed initially can’t use, products based on disruptive technologies.”

Building a new market is hard but the reward in many cases is durability. Let’s come back to music a moment to see an example of artistic durability by comparing a one hit wonder to a groundbreaking artist.

On July 25th, 1965 Bob Dylan unveiled electrified folk music at the Newport Music festival:

…what prompted the outright booing—even over Dylan’s next number, the now-classic “Like A Rolling Stone”—was a sense of dismay and betrayal on the part of an audience unprepared for the singer’s new artistic direction.

Dylan goes electric at the Newport Folk Festival, This Day in History

Despite his prior star power as an acoustic folk artist, when debuting a sound the world had never heard before Dylan had to earn a new audience one fan at a time.

Let’s compare Dylan’s experience building an audience with Scottish electro-folk group Stealer’s Wheel and their hit recording Stuck in the Middle With You released in 1973:

…performed as a parody of Bob Dylan’s paranoia (the vocal impression, subject, and styling were so similar, listeners have wrongly attributed the song to Dylan since its release)…the band was surprised by the single’s chart success. The single sold over one million copies, eventually peaking at No. 6 on the US Billboard Hot 100 chart…

Stick in the Middle With You, Wikipedia

Stealer’s Wheel were able to co-opt the market of electrified pop opened by Dylan and capitalize on Dylan’s prior risk-taking. However, the heights of the fame enjoyed by Stealer’s Wheel was short lived. Nobody would be able to serve Dylan’s fans like Dylan himself.

Creators should be wary of addressing markets which are already visible. Peruse the 50 Most Upvoted Products on Product Hunt for example. Ask yourself, how many of these general-market email clients will remain viable businesses? Beware the siren’s call, lest ye be dashed against the rocks.

Orders of Magnitude

When creating something brand new, it’s useful to organize your journey around serving one order of magnitude at a time. To illustrate:

  • What would need to be done to serve 1 person?
  • What would need to be done to serve 10 people?
  • …to serve 100 people?
  • …1,000 people?
  • …10,000 people?

…and so on.

In practice this means to unconcern yourself with how a process will scale as the business grows before you’ve actually done it. Killing something by saying, “this will never scale” is almost always wrong. Paul Graham of Y Combinator writes eloquently about this in Do Things that Don’t Scale:

Another reason founders don’t focus enough on individual customers is that they worry it won’t scale. But when founders of larval startups worry about this, I point out that in their current state they have nothing to lose. Maybe if they go out of their way to make existing users super happy, they’ll one day have too many to do so much for. That would be a great problem to have.

This advice is especially important for established companies and creators: even though you’re already big, if you’re starting something new start by concerning yourself by making 1 person happy. Forget the big launch. Too often, ideas are killed by big launches.

Here are two examples, the first from Paul Graham on Google Wave:

There may even be an inverse correlation between launch magnitude and success. The only launches I remember are famous flops like the Segway and Google Wave. Wave is a particularly alarming example, because I think it was actually a great idea that was killed partly by its overdone launch.

The second, is Chris Gaines.

Chris Gaines was the alter ego of multi-platinum country recording artist Garth Brooks. The fictional rock signer was created 1999 for Brooks to star in a film called The Lamb. A “greatest hits of Chris Gaines”-style album was released as a sort of “pre-soundtrack” to the film in order to generate buzz. Millions of units were produced and distributed:

Less than expected sales of the album…and no further developments in the production of the film as a result brought the project to an indefinite hiatus in February 2001, and the Gaines character quickly faded into obscurity.

Chris Gaines, Wikipedia

Chris Gaines needed to be treated like a new artist. Instead, Gaines was treated as an extension of Garth Brooks despite Gaines recording music in a completely different genre of music. With incredible hubris, they tried to skip directly to the ‘best-of’ phase of Gaines’s career and failed spectacularly.

Instead of focusing on big launches and designing for scale, focus on making people happy one factor of scale at time. This will allow for the business or creative endeavor to grow at its proper pace, rather than trying to force it and increasing odds of failure. But if you must try to force it…

Special Case: Blitz Scaling

Reid Hoffman and Chris Yeh wrote Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies. Here’s how the authors define the Blitzscaling:

“Blitzscaling is a strategy and set of techniques for driving and managing extremely rapid growth that prioritize speed over efficiency in an environment of uncertainty. Put another way, it’s an accelerant that allows your company to grow at a furious pace that knocks the competition out of the water.”

Perhaps no concept has rendered more harm to entrepreneurship than this one. I’m not saying Blitzscaling doesn’t work. It does. However, it’s a dangerous practice with a high mortality rate. Blitzscaling tends to benefit an investor’s portfolio to the determent of individual companies, their employees, customers, and vendors.

Blitzscaling is often interpreted as growing at all costs, across all dimensions of an organization as quickly as possible: hiring more folks, spending more on ads, and building more features, etc. What’s more, it preaches that developing the revenue side of the business is often unimportant:

“You don’t necessarily need to have solved your revenue model before deciding to blitzscale. In fact, a key element of blitzscaling is often the willingness of investors to fund growth before the revenue model is proven—after all, it’s pretty easy to fund growth after the revenue model is proven.”

The nuance at the beginning of this advice, “you don’t necessarily” and at the end, “after the revenue model is proven” often goes without being understood by entrepreneurs. What is understood is pour on the growth! The result is business fragility. It’s like starting a bonfire with a gasoline: it can get the job done, but it’s extremely dangerous and probably bad for the environment, too.

When Blitzscaling Works

Blitzscaling can work when:

  1. The core of a product is valuable, and is at least marginally more valuable than its alternatives
  2. The core value of the product remains the same or gets better with scale
  3. Financiers believe #1 and #2 are true, and they also believe the business will be valuable at scale

If these 3 conditions are met, it is possible to Blitzscale a business.

When Blitzscaling Fails

The Achilles Heel of Blitzscaling is satisfying constraint #2, “The core value of the product remains the same or gets better with scale.” It is the ultimate “easier said than done” in the business world. Often products get worse as an organization scales. For hard goods it’s easy to intuit: scaling manufacturing and logistics is a nightmare. For knowledge products like apps and services, scaling human processes and organizational culture is anything but straightforward.

Businesses are fragile while scaling. By definition a business that responds well to Blitzscaling grows orders of magnitude through capital injection. Frequently, the competition of these businesses are kept at bay primarily by the competitions’ relative lack of capital, which in an efficient market cannot be counted upon. Not only do technical and operational risks compound in Blitzscaled businesses, but the business must also ward off fast followers. The demands of hyper growth commonly come at the expense of innovation. All of these conditions make the continued survival of a Blitzscaled business precarious.

An investor’s desire for Blitzscaling is entirely rational. Spreading risk among a portfolio, somebody will be successful. One success can return the entire fund. From an entrepreneur’s perspective, they are playing one hand. If that hand folds, it’s game over.

When Blitzscaling May Be Necessary

Venture investors love businesses with “network effects” precisely because these products get more valuable the more users are served, which make them both grow faster while delivering more value to users as they grow. It’s a real-life horn of plenty.

Networked business are also incredible resilient. When the value is in the network, folks tend not to switch away unless another network can provide more value. Since networks tend to be “winner take all” they are very difficult to unseat.

Network effects are well known and well understood. As such, in a race to build and own a new network of value, capital will rush in to assemble the network until there is only one clear winner. Under these conditions, there is often little alternative to Blitzscaling.

Fortunately, there are many businesses and creative endeavors whose value isn’t based on network value, and there are plenty of cases where Blitzscaling isn’t the only option for growing something new and still make consequential impact.

Vertical Value Escalation

From the perspective of an entrepreneur, I want to create a business which maximizes my individual potential for return while minimizing my changes for failure. I also want to have a good time.

Getting started, it means only making a few people happy. As we move from order of magnitude to magnitude—10 to 100 people, 100 to 1,000 people, 1,000 to 10,000, and so on—it means adding new vertical value at each factor of scale to reach the next scale factor, or, starting an adjacent business in a new market that is content with starting over to build a market of 1, 10, 100, 1,000 accounts and so on.

Here ‘vertical value’ means extracting margin on costs by adding products or services by moving down the value chain (for example, how Amazon developed their own hosting services) or moving up the value chain by eating the margin of services that are tangential or above your own place in the value chain (i.e. ‘bundling’).

Compared to Blitzscaling, it’s slower and more difficult. At each phase of scale you’ve got to force the business to innovate on its product offerings. There is no rest. No, “let’s just scale the growth team.” However, the potential for returns are just as great–if not greater—than a Blitzscaled business. And, after the core is established the business becomes resilient to failure: if a vertical or tangential market expansion should fail the business can retreat to its healthy core. Because the business is always healthy, there is little danger of not being able to return value to equity holders who helped to support the business’s mission.

Vertical Value Escalation businesses can also be great fast followers. While the venture market is busy trying to Blitzscale everything in sight, a Vertical Value Escalator can learn which early products and services show promise by watching the market, and use its superior scale (however slight) to prevent these young businesses from taking hold by adding products or services offering similar value to its own value chain. In this way, the Vertical Value Escalator can leverage other organization’s risk taking (and financing) without bearing the risk of its own.

One risk of Vertical Value Escalation businesses: investors typically hate the pitch. Investors like businesses with straightforward, de-risked offerings and go-to-market plans. In effect, they want an opportunity where all they have to do is “just add money.” Vertical Value Escalators are instead, “and then” business plans: first we’ll do X, and then we’ll do Y, and then we’ll add Z to build the market. They sound slow and hard, which are two qualities investors tend to shy away from.

The thing is: investors also say “invest in the team” and when they say that, what they might not realize is they are saying, “find a team that knows how to find and monetize value and not give up no matter where it is.” Which is just the Harvard Business School equivalent of having what it takes to make it as a musician.

About Jordan Husney