Six weeks ago, we wrote about whether the Covid-19 pandemic and associated economic downturn meant the end of the Blitzscaling Era. We answered with a definitive “No,” and since then we’ve seen the NASDAQ stock market index reach an all-time high and strong earnings reports by many of the major technology companies (the two phenomena are likely related). The natural follow-up question many readers have asked is, “How has blitzscaling changed during the Covid-19 pandemic?”
We dive into the details of how the pandemic has changed blitzscaling – and how you can adapt to this new world and the challenges and opportunities it has brought – in this essay, as well as in an episode of the Greymatter podcast. You can listen to that here:
As we noted in the Blitzscaling book, and in our previous essay, blitzscaling is always about relative speed—are you moving faster than the competition? Whether your industry is growing 100% per year or 0% per year, you can always find opportunities to grow your customer base and market share relative to competing offerings. During the Covid-19 pandemic, we believe the best way to find and leverage these opportunities is to follow a three-step process.
Step 1: Set up your defense
The very first step when a crisis hits, let alone an unprecedented shock like the Covid-19 pandemic, is to set up your “defense.” This means taking steps to avoid running out of money. You should go over your finances, income statement and balance sheet, to understand how much capital you have, and how much cash your expenses will consume. To extend your runway, you may need to take difficult and uncomfortable steps like reducing salaries or letting people go. If these measures are necessary, it’s best to act as quickly as possible – both to reduce expenses more quickly, and to give employees and former employees sufficient time to adjust. Most leaders intuitively know this step, but it shouldn’t be overlooked.
Step 2: Capitalize on immediate, direct boosts to growth (if any)
While the Covid-19 pandemic is clearly a huge negative overall, for a few companies and sectors, it has provided a direct boost to growth. This effect has been very apparent for services that are delivered via the internet, or what we call “bits” businesses versus the “atoms” businesses which involve material objects. Zoom, for example, went from one of many web conferencing services to an unofficial standard for group video calls. But capitalizing on this boost isn’t simply a matter of getting lucky and cashing checks; in December, Zoom reported 10 million daily meeting participants, a number which had grown to over 300 million in April. Zoom’s engineering and operations team were able to accommodate this extreme 30X growth in record time, and since the pandemic started, Zoom’s base of paying customers has tripled, and its 2020 revenue forecast has doubled.
Stage 3: Conduct rapid experiments to find new opportunities
Blitzscaling opportunities open up when major systems change occurs. Usually this change comes from one or more technological innovations that open up new markets and new possibilities. The iPhone, for example, combined then new 3G networks, GPS, and capacitive touch screens to upend the telecom industry.
But opportunities may arise when an exogenous event overturns the established order, as in the case of Covid-19. And that absolutely creates the potential for blitzscaling.
The key to uncovering these new opportunities is to conduct rapid experiments to assess whether they represent a real and lasting change or not. For example, Covid-19 forced the sports world to shut down; contact sports and crowded stadiums are clearly risky when it comes to spreading the virus. But sports leagues, media, and athletes quickly pivoted to running rapid experiments to seek new opportunities. The Ultimate Fighting Championship (UFC) company, after an ill-fated attempt to purchase a private island where it could hold matches with crowds, instead held them without crowds, and rather than filling in with fake crowd noise, allowed viewers to hear the fighters and their trainers discussing strategy. The Korea Baseball Organization (KBO), thanks to South Korea’s containment of the Covid-19 pandemic, was able to return to play, with stuffed animals filling the stands. The television network ESPN, without live sports, moved up the release date of its Michael Jordan documentary, The Last Dance, and earned record ratings. When the pandemic is over, we’re unlikely to see sports leagues prefer stuffed animals to fans, but we might see fighter/trainer audio feeds at UFC matches, and more documentary programming at ESPN.
Here are a few of the new opportunities we believe the pandemic has created:
- The business world will see a permanent shift to many more virtual events. In-person events will eventually return, but many will be supplemented or replaced by virtual events. For example, now that everyone has experienced virtual conferences, it’s clear that there are significant advantages to going virtual. With the cost and inconvenience of travel removed, both speakers and attendees can participate in far more events. We could easily see attending a one-hour free or low-cost virtual conference session every week or so, rather than attending a handful of expensive, multi-day, in-person conferences per year
- While very few companies will shift to 100% virtual work, most companies have realized that they can do far more on a remote basis than they previously believed. Rather than treating the model of a single headquarters where people work in person as a default, companies will experiment with a network of offices where team members have the opportunity to gather two to four days per week. This will allow companies to alleviate some of the high real estate costs of expensive cities like New York and San Francisco, tap into a broader pool of talent, and still gain the benefits of regular in-person work, such as social cohesion and serendipitous innovation. Shishir Mehrotra of Coda has been managing distributed teams for a decade; Coda has three physical offices, but no single headquarters. You can read his guide to distributed teams on Coda.
- The overarching opportunity is the rapid acceleration of “digital transformation.” Satya Nadella of Microsoft has described Covid-19 as a gale-force wind pushing every company towards digital transformation. The amount of progress towards moving business to the cloud that companies used to make in a year is now being compressed into a single month, thanks to the power of necessity. In Microsoft’s case, whether its customers are refactoring their supply chains, reinventing their products, or re-instrumenting how they measure their product effectiveness and report back to R&D, Azure is helping them accelerate that change. But you don’t have to be a big corporation to benefit from digital transformation. For example, if you had asked us before the pandemic began whether people would ever work with a personal trainer or physical therapist via videoconference, we would have said, “No way,” because those services are so personal and physical. But it turns out that even though there is some degradation in the experience via video, there are also significant enhancements. As a consumer of such services, it’s extremely convenient to get in a workout or therapy session without the transit time required to get to a facility, and with the ability to take a shower at home immediately afterwards. You can do a session from 7-8 AM, and still be showered and in your office (AKA your kitchen table) with a cup of coffee by 8:30 AM. Then on the supply side, a physical trainer who previously had to cram in sessions from 6 to 9 AM, and from 3 to 7 PM can now take clients throughout the day, because they have the flexibility to schedule a session in the middle of the work day, and the trainer can also work with clients in other time zones.
Once you find a promising opportunity, there are additional differences to blitzscaling during Covid-19, in matters both internal (management) and external (fundraising). One of the major challenges the pandemic presents is how it requires a very different approach to planning. Before Covid-19, many companies, even startups, had quarterly and annual plans, complete with budgets and forecasted revenues. At this point, trying to follow those plans, or even simply reforecasting those plans is likely a fool’s errand given the incredibly high degree of uncertainty.
The old normal is gone, and the new normal—when it finally arrives—will certainly be different. We hope that there will be an effective Covid-19 vaccine next year, but it is all too possible that we might have to wait longer. These radically different potential outcomes make these high-volatility times. Rather than planning and then executing a plan, companies need to maintain a constant process of measurement and re-planning. Notice that we didn’t say not to have a plan; you should set a reasonable baseline so you have some foundation for making and carrying out business decisions. This constant re-planning is tiring, stressful, and frustrating, but it is the best way to make predictions in an unpredictable time.
One way to reduce the stresses and frustrations is to invest more time and energy into gathering better intelligence. Rather than relying on industry reports, which are likely out of date and wrong, call certain customers directly and build your own model. The more accurate your intelligence, the more effective you’ll be. It might be tempting to simply give into pessimism and plan for the worst, since this probably improves your odds of surviving. But if you are overly pessimistic, you might be missing out on potentially huge new opportunities.
Another way to reduce the planning burden and move more quickly is to know when to satisfy rather than optimize. In an unpredictable environment, precision may offer false reassurance; perfect is the enemy of done. Good enough is often good enough when circumstances are likely to change in a matter of weeks anyways.
Once you develop your working (and continually updating) plan, you may need to raise money from investors to carry it out. Just as with everything else, the pandemic has changed the venture fundraising process as well.
Earlier stage investing, such as Seed and Series A rounds, are probably the least affected. Most of these rounds are substantial enough that venture capitalists can tell the entrepreneurs, “Your next fundraise will be far enough out that even if we don’t have a vaccine or cure by then, we’ll at least have adjusted to the new regular course of business, and you’ll be able to raise that round in an environment with much less uncertainty.”
Later rounds will be more challenging, but will still happen, especially when the investors already know the entrepreneur, company, and existing investors well. This higher level of trust is always helpful, but is an even bigger differentiator during these uncertain times. Let’s say I’m potential investor X, and I know and trust investor Y, who previously invested in the company. Even though I can’t meet the founders in person, I can build enough trust through videoconferencing to make the investment. For example, Figma has benefited from the pandemic tailwinds boosting cloud productivity software, and investors have been talking with the founders and previous investors for quite some time, so it was able to raise a $50 million round in April, even though that month saw a major drop in the number of completed venture rounds.
If you’re an entrepreneur and can’t leverage any pre-existing relationships, the current volatility means that you’ll have to work even harder. You will need to tap your network, work through multiple layers of referrals, and spend even more time briefing and updating investors so that they can build their own picture of your company over time.
Unfortunately, we believe that the nature of the crisis, and the way that the Trump administration has mishandled it, means that the impact on venture fundraising will be worse than the 2008 crisis. During that crisis, the Obama administration was able to restore confidence in the market within a matter of months. Yes, stock markets had reset to much lower levels, but the volatility was over, allowing us to start planning for the future again.
In contrast, today we face an uneven public health response, and an uneven approach to supporting businesses and workers. But there is still time to prevent a worst-case scenario. One of the lessons of the modern economy that nearly every industrialized nation has learned, especially the Western democracies and China, is that central governments need to provide whatever stimulus is necessary to keep the economic engine from sputtering to a halt. The great danger to the economy is not the slowdown, but the uncertainty and turbulence which encourages people to not invest and not spend. The policy goal should be to restore the previous status quo, which might not be possible, but to achieve stability, even at a lower run rate. Once it appears certain that the engine is going, governments should then ease back and allow the market to return to its role as the most effective way to allocate resources. There is a reason that capitalism has been the nation-state’s most effective “operating system.”
At Greylock, we tend to invest in things that we hope are multi-decade or longer, industry-transforming businesses that are the stalwarts of the next generation. We ask ourselves, what will this investment look like in 10 years? What will it look like in 20 years? So despite the current turmoil, we’re still excited about investing in the future and the digital transformation of industries driven by technologies like artificial intelligence (AI), cryptocurrency, and the continuing move to the cloud. Given this long-term outlook, it’s broadly business as usual with the proviso that we’re asking entrepreneurs how they’re going to handle an economic downturn.
One of the areas where I’m expecting increased progress because of the pandemic is Augmented Reality (AR) for the workplace. When technologies like HoloLens help professionals work better, it’s easy to make the business case for paying X expense for a predictable Y improvement in productivity. The need for remote working is accelerating this trend. We may see a similar trend in Virtual Reality (VR), which has failed to break through into the mainstream to date, but may see more trials as 3D entertainment at home becomes more and more appealing (especially as kids no longer even have Zoom classes to occupy their time, and have exhausted their streaming television options).
Another promising area is precision health. For example, imagine if we could accurately predict your individual vulnerability to Covid-19. If you found out that you were unusually vulnerable, you could take greater precautions in the form of strict social distancing and mask-wearing. Or perhaps tests could tell you which vaccines would confer long-term immunity, and which would not. This kind of medicine would raise data privacy and security concerns, but the potential benefits would likely outweigh the risks. Yes, we have to avoid downsides, but we should also magnify upsides. Accepting a little downside in exchange for a lot of upside is a beneficial trade.
The Covid-19 pandemic has brought disruption and turbulence. But that disruption and turbulence, while broadly negative and unpredictable, does open up new opportunities. Even during a pandemic, there will still be blitzscaling opportunities. They’ll just look different from the opportunities that emerged during the long economic expansion. It’s more critical than ever to focus on and enable entrepreneurship. When the new normal arrives, we’ll need new products and services that produce new jobs and new companies. This doesn’t mean that existing market leaders won’t have a role to play; Microsoft, Google, Apple, Amazon, and Facebook will still provide their flagship products (and have done well financially, even during the pandemic). But history tells us that the best way to build important new markets is for entrepreneurs to build new companies to tackle new opportunities. One of the things we love about entrepreneurs is their optimism. And frankly, if everyone’s a pessimist, we’ll never get to a better future. It’s thanks to the optimist, thanks to the risk-taker, that progress comes to the world.