Term Sheet -- Monday, October 1

BLITZSCALING

Good morning, Term Sheet readers.

I recently interviewed Reid Hoffman for the October issue of the magazine. We talked about “blitzscaling,” which is the topic of his upcoming book. I hope you enjoy this one.

Reid Hoffman knows a lot about growing companies at a breakneck pace. An executive at PayPal during the company’s earliest days, Hoffman later cofounded social network LinkedIn and now invests in fast-growing companies at Greylock Partners.

For years, Hoffman, who has been referred to as “the startup whisperer of Silicon Valley,” has been advising founders to take risks that prioritize speed over correctness and efficiency. In a new book,Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies, Hoffman shares his secrets for startups that want to achieve global dominance.

The concept he calls “blitzscaling” provides a set of techniques that allow entrepreneurs to grow their businesses quickly, while outmaneuvering competitors.

FORTUNE: What is blitzscaling & who does it apply to?

HOFFMAN: Blitzscaling is prioritizing speed over efficiency in the development of a company even in the face of uncertainty. You are optimizing for growing your business and your customers at a fast rate, which means you’ll spend capital inefficiently and you will do it by taking risks in uncertain times. You choose to do so because that’s how you essentially become the first to scale.

What attributes do entrepreneurs need to better blitzscale their company?

One attribute I look for in entrepreneurs is a willingness to learn. It’s basically that you’re constantly learning and you’re learning at speed. Part of the challenge of blitzscaling is that you have to be constantly evolving your management team. You move from “everyone’s a doer” to “most people are doers” to “managers of doers” to “managers of managers.” There’s this constant evolution during which you have to be learning new patterns, and that requires that you are an intense learner.

Another one is that they have to be constantly recruiting because they need the best people to help them with the company. Are you constantly recruiting new and better executives? Are you bringing the best possible talent on board? Are you bringing in the best possible people as investors? Part of learning is also correlated with recruiting across all these dimensions.

Those attributes are absolutely necessary for a successful blitzscaling entrepreneur.

At what point in a startup’s lifecycle does it need to focus its efforts on blitzscaling?

There are a couple of triggers. If you’re in a complete space by yourself and have no competition and no need for critical mass, generally speaking, you’d do something that’s more like “fast scaling,” in which you measure your customer acquisition cost and focus on effectively spending your dollars and growing your organization in ways that minimizes chaos. But more often than not, for startups, you either have actual competition or prospective competition because in a hyper-connected world, competition can come from anywhere.

You’re often in a situation where competition is coming or it’s already there and you have to think about how to beat it. What you’re doing is you’re running toward a place where the market will let you blitzscale as much as possible. You’re actually running for the launch point before your competition because the first to scale is what matters.

In the process of running toward the launch point, you’re figuring out product-market fit and you’re aligning capital to try and recruit the best possible talent. One thing about blitzscaling is that it’s not about being sure yet of your business plan or your go-to-market strategy — you’re launching into it while you’re working on those things.

Is it naive to think that the same person can continue to lead the company as it enters each new growth stage?

It’s not naive. In fact, your preference as an investor is to have the founder scale the whole way. Think Mark Zuckerberg and Jeff Bezos. That’s a good thing from an investor’s standpoint. Now, what generally happens is that you’re constantly evolving your management team. There’s no science to this, but I often counsel founders and tell them they’ll probably trade out half of their management team.

Your executives change and rotate a lot as you grow, and one of the pieces of advice I give is: Never promise them they’ll be head of product forever. Promise that as long as they’re doing a good job, their job will always be growing with more responsibility and new challenges. But that doesn’t mean they’ll always be head of product. It’s important to remember that everything changes as you grow.

You write that the key rule for many blitzscaling companies is to “ignore your customers.” because it’s “one of the fires that’s easier to let burn until you have finished fighting bigger, more deadly fires.” How do you justify this idea?

Well, it’s not that you always ignore your customers, but you ask yourself: “What are the key things I need to do, and what do I need to ignore in order to scale?” With PayPal, we knew that customer service email complaints were growing exponentially. We knew we could survive getting low product ratings for a while because we were still an absolutely essential service so we could focus on building out our product.

Of course, if you ignore your customer forever, you die. It’s that we were able to ignore a piece of it temporarily in order to get to a high volume and become an essential part to how payments are made on the web. Ultimately, that’s what made us valuable to customers.

Ignoring your customers forever is a recipe for death. It’s about ignoring customers in certain aspects because that’s the right way to play.

What role does culture play in blitzscaling?

Culture becomes the shorthand of how the whole company operates. Who are the folks you’re hiring? How do they work together? What are the ways you make decisions? The reason why it’s important to create a very effective culture is because it allows you to quickly define an operating, decision-making values structure for what you’re doing.

Of course, you can do culture badly, too. You have to make sure that your culture isn’t made up of people who look just like you. Your culture is a set of values on how you operate, but you have to ensure it also has the right kind of inclusive characteristics, so you have those as you scale as well.

In the case of Uber, it was a company that grew at a breakneck speed but the toxic culture caught up with it. What is the difference between what happened to Uber and what happened to Airbnb, a company that also ran through walls and clashed with regulators, competitors, and governments?

The difference was about how Uber failed to make the transition from pirate to Navy. In many ways, a lot of startups are like pirates, but to scale effectively, you need to transition to a Navy ship.

One of the cultural aspects is that Airbnb was struggling with regulators just like Uber. But Airbnb was saying, “We’re willing to work with you to come to a shared vision,” whereas Uber was pissed off and basically implying that, “This is the way we’re doing it, and if you don’t like it, we’re going to run around you because we don’t care.”

As opposed to trying to work with cities, Uber took the approach of, “Screw you, we’re going to do it anyway.” That “screw you” leads to a whole bunch of pirate-like behavior all the way down the management chain.

If you’re executing the blitzscaling plan, how do you know it’s working and you’re not just burning cash and experiencing regular growth?

To some degree, if you do it the smart way, you try to figure out whether your unit economics will work in the end and your organization will be a place that you can normalize after you’ve blitzscaled. You’re constantly paying attention to all those things. In terms of knowing whether you’re on track, to some degree, the simplest measure is are you able to raise the capital or are you able to bring in revenue that funds the blitzscaling?

[Venture investors are] usually pretty smart and care a lot. But that’s a test. If someone is willing to write you a check for $50 million, $100 million, or $200 million, then as long as you’re both having a genuine conversation about the business, that’ll indicate that you're at least on track.

Similarly, you can tell when you look at the talent. Is your company becoming attractive to really high-quality talent? That’s the talent validator for blitzscaling.

And of course, you’re constantly analyzing the business, thinking about customer acquisition, and looking at the churn rate. It’s those types of signals that tell you whether you’re on track.

But by the way, you only fully know once you get close to the destination.

That can be dangerous.

Yeah. It’s scary.

Read the story on Fortune.com.

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...AND ELSEWHERE

Slack is reportedly preparing for an early 2019 IPO. David Solomon starts his tenure as Goldman CEO. Most ICO project financing unaffected by crypto market crash. How California will get more women on public boards. Two-thirds of U.S. business economists expect a recession by end of 2020.

VENTURE DEALS

•Blok.Party, a South San Francisco-based gaming company, raised $10 million in funding. Investors include JRR Capital.

•Broadly, an Oakland, Calif.-based provider of marketing services for small businesses, raised $10 million in funding. Foundry Group and Calibrate Ventures co-led the round, and were joined by investors including Team Builder Ventures.

•Checkpoint Surgical Inc, a Cleveland, Ohio-based medical device company, raised $8.8 million in funding. Mutual Capital Partners led the round, and was joined by investors including First Analysis and the JumpStart NEXT Fund.

•SLAMcore, a UK-based developer of spatial artificial intelligence algorithms for robots and drones, raised $5 million in funding. Amadeus Capital Partners led the round, and was joined by investors including Mirai Creation Fund, Toyota AI Ventures, MMC Ventures and Octopus Ventures.

•Elements Talent Solutions, a company focused on the recruitment market, has received a £3.45 million ($4.5 million) in funding from BGF.

PRIVATE EQUITY DEALS

•Meridian Waste, which is backed by Warren Equity Partners, acquired Partner Disposal, a Florida-based provider of solid waste services. Financial terms weren't disclosed.

•Värde Partners agreed to invest 60 million pounds ($78 million) in Masthaven, a U.K.-based bank.

•Bruin Sports Capital acquired Soulsight, a Chicago-based design company that provides brand packaging and merchandise design services.

•Ara Partners Group acquired a majority stake in Centric Gas Services, a Magnolia, Texas, operator of four local gas distribution companies and three gas transmission pipeline companies. Financial terms weren't disclosed.

OTHER DEALS

IPOs

•Slack, the workplace messaging maker, is reportedly eyeing an IPO in 2019 that could value the firm above $7 billion, The Wall Street Journal reports. Read more.

•Aston Martin, the luxury British carmaker, narrowed the range of its IPO to 18.50 pounds to 20 pounds, Reuters reports. The firm previously set a range of 17.50 pounds to 22.50 pounds. Read more.

•Funding Circle, the British fintech company, raised 300 million pounds in an IPO after pricing at the bottom end of its range. That valued the firm at about 1.5 billion pounds. Read more.

•Revolve, a Cerritos, Calif.-based online fashion retailer, filed for an $100 million IPO. It posted revenue of $399.6 million in 2017 and income of $5.3 million. TSG Consumer Partners backs the firm. Morgan Stanley, Credit Suisse, and BofA Merrill Lynch are underwriters. It plans to list on the NYSE as ” RVLV.” Read more.

•Samoyed Holding, a Shenzhen-based credit card repayment firm, filed for an $80 million IPO. It posted revenue of $36.3 million in 2017 and loss of $13.3 million. CITIC backs the firm. Morgan Stanley, Deutsche Bank, and CICC are underwriters. It plans to list on the NYSE as “SMY.” Read more.

•NGM Biopharmaceuticals, a South San Francisco-based biotech developing therapies for NASH and Type 2 Diabetes, filed to raise $75 million in an IPO. The firm posted revenue of $77 million in 2017 and loss of $14.2 million. The Column Group (25.1%), Merck Sharp and Dohme (16.3%), and Prospect Ventures (9.1%) back the firm. Goldman Sachs, Citi and Cowen are underwriters. It plans to list on the Nasdaq as “NGM.” Read more.

•Gamida Cell, a Jerusalem, Israel-based Phase 3 biotech creating hematologic malignancies therapies, filed for a $69 million IPO. It posted loss of $19 million in 2017. Novartis Pharma (21.6% pre-offering), Clal Biotechnology (18.6%), and Elbit Cord Blood(17.9%) back the firm. BMO Capital Markets and RBC Capital Markets are underwriters. It plans to list on the Nasdaq as “GMDA.” Read more.

EXITS

•Clearlake Capital agreed to acquire Unifrax, a Tonawanda, N.Y.-based provider of specialty fibers and inorganic materials, from American Securities. Financial terms weren't disclosed.

FIRMS + FUNDS

•H.I.G. Capital, a Miami-based private equity and venture capital firm, raised $932.4 million for its third growth buyout fund, according to an SEC filing. The target is $950 million.