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February 6, 2019 09:20 pm

'The Fundamental Problem With Silicon Valley's Favorite Growth Strategy'

Tim O'Reilly, writing for Quartz: The pursuit of monopoly has led Silicon Valley astray. Look no further than the race between Lyft and Uber to dominate the online ride-hailing market. Both companies are gearing up for their IPOs in the next few months. Street talk has Lyft shooting for a valuation between $15 and $30 billion dollars, and Uber valued at an astonishing $120 billion dollars. Neither company is profitable; their enormous valuations are based on the premise that if a company grows big enough and fast enough, profits will eventually follow. Most monopolies or duopolies develop over time, and have been considered dangerous to competitive markets; now they are sought after from the start and are the holy grail for investors. If LinkedIn co-founder Reid Hoffman and entrepreneur Chris Yeh's new book Blitzscaling is to be believed, the Uber-style race to the top (or the bottom, depending on your point of view) is the secret of success for today's technology businesses. Blitzscaling promises to teach techniques that are "the lightning fast path to building massively valuable companies." Hoffman and Yeh argue that in today's world, it's essential to "achieve massive scale at incredible speed" in order to seize the ground before competitors do. By their definition, blitzscaling (derived from the blitzkrieg or "lightning war" strategy of Nazi general Heinz Guderian) "prioritizes speed over efficiency," and risks "potentially disastrous defeat in order to maximize speed and surprise." Many of these businesses depend on network effects, which means that the company that gets to scale first is likely to stay on top. So, for startups, this strategy typically involves raising lots of capital and moving quickly to dominate a new market, even when the company's leaders may not know how they are going to make money in the long term. This premise has become doctrine in Silicon Valley. But is it correct? And is it good for society? I have my doubts. Imagine, for a moment, a world in which Uber and Lyft hadn't been able to raise billions of dollars in a winner-takes-all race to dominate the online ride-hailing market. How might that market have developed differently?

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