Hello and welcome. You are listening to Patrick Boyle on Finance, a podcast exploring ideas from quantitative finance, examining events occurring in markets right now and financial history to see what lessons can be taken away, including interviews with some of the most interesting people in the world of finance. To learn more about the podcast, visit

onfinance.org.

The race to a $1 billion market cap for startup companies has been getting faster and faster

over time. It took the average S&P 500 company 20 years to reach a billion dollar

valuation. It took Google 8 years, Facebook 6 years and Uber just three years to surpass

this level. It would appear that there are two basic approaches to growing a company.

The first more old-fashioned approach is to come up with

a good way of making money and then try to do more of it. The second more innovative approach

is to find something that loses money, scale it up as much as possible, and then eventually

try to find a way of making it profitable.

I'm not sure if that last step is actually necessary though.

If you can grow the business quickly enough, your company might become really valuable long before you ever flip to profitability.

The first model is of course boring and the second model has become the dominant Silicon

Valley business model over the last 20 years or so.

In fact, it was given the name Blitzscaling by Reid Hoffman, the founder of LinkedIn.

The blitzscaling approach is not applied to every type of business, but mainly to network affects businesses, where you aim to

become the dominant player in your industry and then pivot to profitability. A network

effect business is one where the value of the product or service increases when a number of

people who use that product or service increases.

The big idea is that user acquisition costs should decline as you achieve scale and network

effects. And then once you are the dominant player in your sector, you can start pushing

up prices and the unprofitable, fast-growing, subsidized

...