Blitzscaling—a business strategy whereby companies focus on increasing their scale rather than profits—has long been the religion of Silicon Valley. It’s easy to see why; for years, the success of some of today's largest tech companies (i.e. Uber, Airbnb, Facebook, Twitter) has been credited to entrepreneurs who valued growth potential over near-term sustainability.
But choosing to scale rapidly while putting profitability on the proverbial back-burner isn’t a silver bullet. Blitzscaling can fail, and often does when startups are not in a hot sector.
Still, that didn’t discourage entrepreneurs from attempting to replicate the success of blitzscaling in the cannabis industry. With cannabis firms spending billions of dollars on building new facilities and/or production capacity expansion between 2016-2019, the North American marijuana market was practically engulfed by the concept of blitzscaling.
Of course, with hindsight it’s easy to critique the marijuana industry’s blitzscaling modus operandi during those years. I merely use it as a cautionary tale, as I’m sure you’ve all seen the recent bankruptcies, liquidations, and desperation financings in the sector.
With the winds of consolidation in the air, now is a good time for reflection on how blitzscaling shaped the global cannabis industry—and why it didn’t work out quite the same way it has for many Silicon Valley firms.
How cannabis blitzscaling went awry
First and foremost, cannabis companies that attempted to blitzscale were at an immediate disadvantage due to lengthy project timescales: unlike releasing a new software upgrade, building out a multi-million dollar cannabis production facility can take years. Not only that, but cannabis firms were at the mercy of an evolving regulatory landscape.
“Historically, stories of breakneck growth involved either computer software, which offers nearly unlimited scalability in terms of distribution, or software-enabled hardware, such as the Fitbit fitness tracker or Tesla electric car, whose software component allows the company to innovate on software timescales (days or weeks) rather than hardware timescales (years). Moreover, the speed and flexibility of software development allow companies to iterate and recover from the inevitable missteps of haste."
Blitzscaling is most effective when there are two components involved: 1) a disruptive innovation and 2) a long, drawn-out period of optimism for the sector.
Many cannabis companies were blitzscaling under the impression that legal markets would continue to open up around the world—almost sequentially. However, the timeline for widespread cannabis legalization remains unknown and behind most predictions—meaning, many cannabis companies may have “overscaled” their operations relative to the size of the market opportunity.
Adam Bierman said it best in an interview with the Financial Post during his time as MedMen’s Chief Executive Officer,
“The last [cannabis] industry chapter was defined by growth at all costs . . . Now we’re transitioning out of that chapter, and that transition is harsh and quick.”
“. . . We’re now entering a stage where [cannabis] businesses are going to have to be self-sustaining.”
Blitzscaling Isn’t Always the Answer
Given the widely publicized successes of companies like Uber and Airbnb, many entrepreneurs have been led to believe that the only way to build a successful business is through aggressive scaling, no matter the costs.
Blitzscaling isn't always the best idea, as evidenced by recent developments in the cannabis industry. And it won’t be the last sector to be beaten down by this strategy. In my view, it’s an all-in, high risk high reward strategy. What makes blitzscaling so challenging, is the entrepreneur requires an above average duration for an industry cycle if the strategy is to work.