Is “Bliztscaling” The Real Threat To Pakistani Start-ups?admin pakanalysis
Written By: Talal Ahmad
Social Entrepreneur and Business Consultant
The funding frenzy in the Pakistani startup scene is not alien to anyone. In fact, 2021 has seen record-high investments with Pakistani startups raising $310 million. For example, Tazah closed its pre-seed round at $6.5 million. Furthermore, this trend is not grounded in early-stage funding, with the country seeing higher investments in later rounds as well. Bookme raised $7.5 million in its Series A round, while Bagallery raised $4.5 million in a similar round.
From the looks of it, the startup ecosystem seems to be faring well, with a bright future ahead of it – or is it?
The bulk of money invested through VCs is explained by the fact that interest rates in most countries are low, which causes investors to seek an alternative source of income. In an attempt to earn beyond what is offered by treasuries, many investors have turned their eyes towards Mena and South Asia. However, what happens when the interest rates in the U.S rise? Many of the upcoming startups in Pakistan are being funded on the premise of blitzscaling. This is a term coined by Reid Hoffman to describe a business philosophy that requires rapid scaling through large investments, in order to become the first mover. But how sustainable is this?
As discussed above, once the foreign bonds become more attractive, investors and much of the capital will flow out of Pakistan. Gaining funds will become more challenging and the survival of many businesses would be threatened. Besides this, blitzscaling as a growth strategy has been challenged for quite some time now. However, for us to truly understand its consequences we need to understand how blitzscaling works.
Paypal has often been provided as an example of the testament of blitzscaling. Back in 2000, the company saw a growth of 5% per day, allowing people to settle their charges using credit cards while using the service for free. This left the company to absorb the charge on each transaction, which was about 3%. This enabled Paypal to quickly build an enormous user base, ultimately allowing the company to charge businesses to accept Paypal payments, thanks to its market power. They further persuaded many customers to make direct bank transfers for those payments. If Paypal had waited to figure out its business model, a competitor might have beaten them to their customers. This, therefore, required them to grow faster than their competitors in order to retain and expand market share, and blitzscaling did just that.
This example however is misleading. Paypal’s success cannot be generalized due to the simple yet painful truth: Not every business can become a unicorn. According to a LinkedIn article, for blitzscaling to be successful the following conditions need to be fulfilled: The market has to be really big; there has to be a sustainable competitive advantage (e.g., network effects) from getting bigger faster than the competition; you have to have efficient means to bootstrap distribution; and you have to have high gross margins so that the business will generate positive cash flow and profits when it does get to scale.
When you set your entrepreneurial goal to become a unicorn, you are locking yourself and your business on a road towards rapid growth and increasing pressure from investors to satisfy various benchmarks. Unfortunately, more often than not, startups succumb to this pressure and fail.
Then what should startups do? Perhaps it is wise to rethink our definition of who an entrepreneur is. The reason for the failure of so many startups may not ultimately be blitzscaling – it might go deeper. It is the urge to generate as much cash in the shortest span of time, as possible. However, while this logic works for venture capitalists, who want as big of a return on their investment as possible, it should make little sense for you, as an entrepreneur. An entrepreneur’s goal should be to make his/ her business the best it can possibly be. This is perhaps best explained by Najam A. Anjum in his book “Bedtime Stories for Sleepless Entrepreneurs”.
In his book A. Anjum takes a utilitarian approach to entrepreneurship by explaining the Quadruple bottom line (QBL) of business. Nowadays the concept of three bottom lines is widely understood, i.e a business person should not only prioritize profits but also people and the planet. However, A. Anjum argues that it is the 4th bottom line that is amiss in businessmen nowadays, which is imperative to realize the true nature of an entrepreneur. That is Purpose.
The meaning of entrepreneurship, according to him, then becomes “the tendency of an individual identifying a need and taking action to provide a solution for that need without regards to the resources available”. This definition advocates for a need-based approach, contrary to the means based approach we see many startups following nowadays. It states that an entrepreneur should identify a need and take proactive action to develop a proof of concept through bootstrapping. Most importantly, an entrepreneur should believe in the wider purpose he wishes to achieve and focus on creating a robust business rather than generating funds.