The 80/20 rule for startup blitzscaling
What Reid Hoffman’s startup “blitzscaling” follow the 80/20 rule (universal “rule of thumb” often used in business)?
Here is my take on making this connection.
The thought of connecting these concepts came to me after reading two great books — “Blitzscaling: The Lightning-Fast to Building Massively Valuable Companies” by Reid Hoffman and “The 80/20 Principle: The Secret of Achieving More With Less” by Richard Koch.
Blitzscaling. In his book, Hoffman provides a great summary of techniques for “scaling up at a dizzying pace that blows competitors out of the water”. These techniques include business model innovation, strategy innovation, and managerial effort for hyper-growth.
80/20 rule. I believe that most are familiar with the classic 80/20 rule (a.k.a. Pareto principle, the law of the vital few, the principle of factor sparsity, etc.): ~80% of sales come from 20% of clients, ~80% of the result is achieved in 20% of the time, ~80% of wealth is owned by 20% of the population, etc. Common use cases include revenue analysis, client base analysis, and resource base analysis. Consultants dive deep into the “most productive” 20% to learn what makes it special, how to replicate that success, or how to de-prioritize the least productive 80%.
As the classic 80/20 rule is used to analyze and dissect, I propose to invert the rule and apply it to output expansion by redefining the “base”.
Inverting the 80/20 rule. My idea is to assume that our current output level (revenue, profit, customer list, etc.) is just “the first 20%” of our full potential. To achieve our full potential, we need to add “the remaining 80%” to the output. Similar logic applies to our input/resources: we assume that we’ve achieved our current output by spending just “the first 80%” of resources and we can reach our full output potential by adding “the remaining 20%” to our resource spend.
On the one hand, such output vs cost growth ratio contradicts the law of diminishing returns. On the other hand, the “learning curve” suggests that as companies gain experience, they become more productive, make fewer mistakes, and generate less waste.
Mathematically speaking, the proposed inverted 80/20 rule assumes that we can grow our output by 5x (+400% = 1/0.2 -1) while increasing our cost by 1.25x (+25% = 1/0.8–1).
The question of whether this revenue vs cost growth target is realistic or not remains open, but it can definitely serve as a North Star for startup hyper-growth.
Inverting the 80/20 rule example. Let’s take a hypothetical example: a company with $20k revenue and $80k cost (generating losses, like most early-stage startups). According to the proposed inverted 80/20 rule, this company starts calling its $20k revenue “the first 20%”, suggesting that it has achieved only 20% of its potential and can add “the remaining 80%” to its input (+$80 or 5x growth).
At step 2, our company considers the new $100k revenue as “the first 20%” and sets a goal to add $400k (5x growth) to become a $0.5M revenue company.
What happens to the resources spent to accommodate such exploding growth? Instead of following the revenues and growing proportionally, our startup strives (according to the inverted 80/20 rule) to get away with only $20k in additional cost (1.25x growth). In step 2, we consider the $100k cost as “the first 80%” and add $25k.
Fast forward, in just 7 steps, the inverted 80/20 rule suggests that the output would grow from $20k to ~$1.5B — at 5x each period. At the same time, the cost would grow at 1.25x from $80k to a mere $381k, boosting productivity from 0.25 to ~4,100.
Like Amazon’s “Day 1” manifesto, we can call it “the first 20%” principle. Sounds like a great blitzscaling goal for startups, but is it possible? Facebook’s and Google’s public numbers don’t resemble 5x revenue vs 1.25x cost growth (using headcount as a proxy for cost). Fortune’s list of 100 Fastest Growing Companies (link) also shows much more moderate 3-year average revenue growths: ranging from 30% to 140% for the top-10 companies.
Maybe private early-stage VC-backed startups can boast such numbers?