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?

Uber and Lyft have developed powerful services that delight their users and are transforming urban transportation. But if they hadn’t been given virtually unlimited capital to offer rides at subsidized prices taxicabs couldn’t match in order to grow their user base at blitzscaling speed, would they be offering their service for less than it actually costs to deliver? Would each company be spending 55% of net revenue on driver incentives, passenger discounts, sales, and marketing to acquire passengers and drivers faster than the other? Would these companies now be profitable instead of hemorrhaging billions of dollars a year? Would incumbent transportation companies have had more time to catch up, leading to a more competitive market? Might drivers have gotten a bigger share of the pie? Would a market that grew more organically—like the web, e-commerce, smartphones, or mobile mapping services—have created more value over the long term?

We’ll never know, because investors, awash in cheap capital, anointed the winners rather than letting the market decide who should succeed and who should fail. This created a de-facto duopoly long before either company had proven that it has a sustainable business model. And because these two giants are now locked in a capital-fueled deathmatch, the market is largely closed off to new ideas except from within the existing, well-funded companies.

There are plenty of reasons to believe that blitzscaling makes sense. The internet is awash in billionaires who made their fortune by following a strategy summed up in Mark Zuckerberg’s advice to “move fast and break things.” Hoffman and Yeh invoke the storied successes of Apple, Microsoft, Amazon, Google, and Facebook, all of whom have dominated their respective markets and made their founders rich in the process, and suggest that it is blitzscaling that got them there. And the book tells compelling tales of current entrepreneurs who have outmaneuvered competitors by pouring on the gas and moving more quickly.Hoffman recalls his own success with the blitzscaling philosophy during the early days of Paypal. Back in 2000, the company was growing 5% per day, letting people settle their charges using credit cards while using the service for free. This left the company to absorb, ruinously, the 3% credit card charge on each transaction.

Paypal built an enormous user base quickly, giving the company enough market power to charge businesses to accept Paypal payments. They also persuaded most customers to make those payments via direct bank transfers, which have much lower fees than credit cards. If they’d waited to figure out the business model, someone else might have beat them to the customer that made them a success: eBay, which went on to buy Paypal for $1.5 billion (which everyone thought was a lot of money in those days), launching Thiel and Hoffman on their storied careers as serial entrepreneurs and investors.

Of course, for every company like Paypal that pulled off that feat of hypergrowth without knowing where the money would come from, there is a dotcom graveyard of hundreds or thousands of companies that never figured it out. That’s the “risks potentially disastrous defeat” part of the strategy that Hoffman and Yeh talk about. A strong case can be made that blitzscaling isn’t really a recipe for success but rather survivorship bias masquerading as a strategy.

Hoffman and Yeh also make the point that what most often drives the need for blitzscaling is competition; an entrepreneur with a good idea can be too close to the center of the bullseye, inevitably drawing imitators. The book opens with an excellent tale of how Airbnb used blitzscaling to respond to the threat of a European copycat company by raising money to open and aggressively expand its own European operations years before the company would otherwise have chosen to do so.

But sometimes it isn’t just the threat of competition that drives the need to turbocharge growth: It’s the size and importance of the opportunity, and the need to get big fast enough to effect change. For example, you can make the case that if Uber and Lyft and Airbnb hadn’t blitzscaled, they would have been tied up in bureaucratic red tape, and the future they are trying to build wouldn’t just have happened more slowly. It would never have happened.

So why is blitzscaling relevant to us? It’s not about making millions and snuffing out the competition—as in many of the most compelling cases for blitzscaling, it’s about building enough momentum to break through the stone walls of an old established order. In our case, we are attempting to save taxpayers money, and radically alter the lives of millions of Americans.

In short, there are compelling reasons to blitzscale, and the book provides a great deal of wisdom for those facing a strategic inflection point where success depends on moving much faster. But I worry that the book oversells the idea, and that too many entrepreneurs will believe this is the only way to succeed.

To understand why I’m skeptical about blitzscaling, you have to understand a bit about my own entrepreneurial history. I started my company, O’Reilly Media, 40 years ago with a $500 initial investment. We took in no venture capital, but despite that have built a business that generates hundreds of millions of dollars of profitable annual revenue. We got there through steady, organic growth, funded by customers who love our products and pay us for them.

Emulating the tortoise, not the hare, has been our goal. We’ve always preferred opportunities where time is an ally, not an enemy. That’s not to say that we haven’t had our share of blitzscaling opportunities, but in each of them, we kickstarted a new market and then let others take the baton.

There’s another point that Hoffman and Yeh fail to address. It matters what stories we tell ourselves about what success looks like. Blitzscaling can be used by any company, but it can encourage a particular kind of entrepreneur: hard-charging, willing to crash through barriers, and often ruthless.

We see the consequences of this selection bias in the history of the on-demand ride-hailing market. Why did Uber emerge the winner in the ride-hailing wars? Sunil Paul, the founder of Sidecar, was the visionary who came up with the idea of peer-to-peer taxi service provided by people using their own cars. Logan Green, the co-founder of Lyft, was the visionary who had set out to reinvent urban transportation by filling all the empty cars on the road. But Travis Kalanick, the co-founder and CEO of Uber, was the hyper-aggressive entrepreneur who raised money faster, broke the rules more aggressively, and cut the most corners in the race to the top.

In 2000, a full eight years before Uber was founded, Sunil Paul filed a patent that described many of the possibilities that the newly commercialized GPS capabilities would provide for on-demand car sharing. He explored founding a company at that time, but realized that GPS-enabled phones weren’t common enough. It was just too early for his ideas to take hold.

Green and Zimmer heard about Paul’s work on Sidecar, and realized immediately that this model could help them realize their original vision for Zimride. They pivoted quickly from their original vision, launching Lyft as a project within Zimride about three months after Sidecar. When Lyft took off, they sold the original Zimride product and went all-in on the new offering. (That’s blitzscaling for you. Seize the ground first.)

Uber was an even more aggressive blitzscaler. Hearing about Lyft’s plans, Uber announced UberX, its down-market version of Uber using ordinary people driving their own cars instead of chauffeurs with limousines, the day before Lyft launched, even though all that it had developed in the way of a peer-to-peer driver platform was a press release. In fact, Kalanick, the co-founder and CEO, had been skeptical about the legality of the peer-to-peer driver model, telling Jason Calacanis, the host of the podcast This Week in Startups, “It would be illegal.”

And the race was on. Despite his earlier reservations about the legality of the model, Uber out-executed its smaller rivals, in part by ignoring regulation while they attempted to change the rules, and became the market leader. Uber also followed the blitzscaling playbook more closely, raising far more money than its rivals, and growing far faster. Lyft managed to become a strong number two. But by 2015, Sidecar was a footnote in history, going out of business after having raised only $35.5 million to Uber’s $7.3 billion and Lyft’s $2 billion. To date, Uber has raised a total of $24.3 billion, and Lyft $4.9 billion.

Hoffman and Yeh embrace this dark pattern as a call to action. Early in their book, Blake, the cynical sales manager played by Alec Baldwin in the movie Glengarry Glen Ross, appears as an oracle dispensing wise advice:

“As you all know, first prize is a Cadillac Eldorado. Anyone wanna see second prize? Second prize is a set of steak knives. Third prize is you’re fired. Get the picture?”

In the real world, though, while Sunil Paul’s company went out of business, it was Travis Kalanick of Uber who got fired. Stung by scandal after scandal as Uber deceived regulators, spied on passengers, and tolerated a culture of sexual harassment, the board eventually asked for Kalanick’s resignation. Not only that, Uber’s worldwide blitzscaling attempts—competing in ride-hailing not only with Lyft in the US but with Didi in China and with Grab and Ola in Southeast Asia, and with Google on self-driving cars—eventually spread the company too thin, just as Guderian’s blitzkrieg techniques, which had worked so well against France and Poland, failed during the invasion of Russia.

Meanwhile, the forced bloom of Uber’s market share lead became a liability even in the US. Even though Uber had far more money, the price war between the two companies cost Uber far more in markets where its share was large and Lyft’s was small. Lyft focused on the US market and began to chip away at Uber’s early lead. It also made significant gains on Uber as passengers and drivers, stung by the sense that Uber was an amoral company, began to abandon the service. Uber is still the larger and more valuable company, and Dara Khosrowshahi, the new CEO, has made enormous progress in stabilizing its business and restoring its reputation. But Lyft’s gains appear to be sustainable.

Google, Facebook, Microsoft, Apple, and Amazon are icons of the blitzscaling approach, this idea is plausible only with quite a bit of revisionist history. Each of these companies achieved profitability (or in Amazon’s case, positive cash flow) long before its IPO, and growth wasn’t driven by a blitzkrieg of spending to acquire customers below cost, but by breakthrough products and services, and by strategic business model innovations that were rooted in a future that the competition didn’t yet understand. These companies didn’t blitzscale; they scaled sustainably.

Google raised only $36 million before its IPO—an amount that earned Sidecar’s Sunil Paul the dismal third prize of going out of business. For that same level of investment, Google was already hugely profitable.

Facebook’s rise to dominance was far more capital-intensive than Google’s. The company raised $2.3 billion before its IPO, but it too was already profitable long before it went public; according to insiders, it ran close to breakeven from fairly early in its life. The money raised was strategic, a way of hedging against risk, and of stepping up the valuation of the company while delaying the scrutiny of a public offering. As Hoffman and Yeh note in their book, in today’s market, “Even if the money doesn’t prove to be necessary, a major financing round can have positive signaling effects—it helps convince the rest of the world that your company is likely to emerge as the market leader.”

Even Amazon, which lost billions before achieving profitability, raised only $108 million in venture capital before its IPO. How was this possible? Bezos realized that his business generated enormous positive cash flow that he could borrow against. It was his boldness in taking the risk of borrowing billions (preserving a larger ownership stake for himself and his team than if he had raised billions in equity), not just Amazon’s commitment to growth over profits, that helped make him the world’s richest man today.