The MBA student sitting across from my desk looked pale and upset. Clearly, she hadn’t slept the night before. I wondered whether there had been a death in her family or whether she had been diagnosed with a serious illness.
She heaved a sigh and said, “It’s all ruined.”
“What’s ruined?” I asked.
“Everything. It’s all down the drain,” she replied.
“What happened?”
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| Philip Anderson |
“I have a filter that dumps articles and press releases into a folder based on keywords related to my business plan,” she answered. “Last night, I checked the folder, and there was a press release announcing that a company doing almost exactly what I’m doing received US$ 3.5 million from a venture capital fund.”
“I would have thought that is good news, not bad news,” I suggested.
“You don’t understand!” she wailed. “I’ve spent my entire year working on this idea so I could start a company after graduation. But now I have been scooped! Someone got there ahead of me, so I’m going to have to throw away the work I have done and come up with a different concept!”
Many entrepreneurs have related to me a moment such as this, when they find out that another entrepreneur (or in some cases a large company) is starting a business very similar to theirs. The feeling, they tell me, is like a blow to the stomach. When you create a novel business idea and build it into an enterprise, it’s quite de-moralizing to learn that someone has beaten you to the marketplace. Because first-mover advantage is often the cornerstone of an entrepreneurial strategy, finding out that you are not a first-mover is more than disappointing — it can sap your morale and make you question your entire endeavor.
An even worse moment can occur when you are presenting your business idea to someone whose support you need — for example, a venture capitalist — and s/he tells you that some other entrepreneur tried to do the same thing before and failed. Often, that is treated as if it were definitive evidence. If someone else tried your idea and went out of business, you must have been too ignorant to know that your concept is 'A Proven Bad Idea.'
The key thought I want to convey in this month’s column is that when someone tells you, “But that’s been done before!” or tells you that a competitor has beaten you to market, you may well be hearing positive news. Being the first company to a market space or the only one addressing a market space is not necessarily a good thing. There are surprising benefits to having competition, and even more surprising benefits to pursuing an idea that has already failed before.
For example, suppose you decide to start a website that sells online fashion and sports apparel to young, well-off, fashion-conscious customers around the world. You assemble a stable of famous brands such as Tommy Hilfiger and Adidas, and provide your customers with a virtual salesperson who seems human to them and who becomes a sort of online friend. You provide customizable virtual mannequins so your audience can visualize what the clothes will look like when they wear them.
Before too long, you will probably learn that this was exactly the idea behind Boo.com, one of the most famous fiascos in Internet history. Boo.com opened in November, 1999 and went bankrupt in May, 2000, sucking down with it an estimated US$ 135 million in investors’ money. Should you now conclude that your idea is a proven failure and that you should move on to something else?
What we learn from the failure of Boo.com is not that the sports/fashion space online is toxic. What we learn is that attacking that space the way these entrepreneurs did it at the time they launched their enterprise didn’t work. The lessons learned include, “Don’t build a huge infrastructure before you have sales,” and “Engage in thorough usability testing before you launch,” and “Launching in thirty countries at once is risky.” You’ll have to show prospective investors that you understand why Boo.com failed and explain what you are doing differently. But the fact that they failed — visibly, completely, and expensively — does not prove that any other venture choosing to attack the same space is doomed. Someday, another firm might well build a huge business following the trail that Boo.com blazed.
When you move forward with an idea that has failed before, you end up enjoying an unusual competitive edge. Potential rivals will dismiss you, because they think you are either naïve or stupid. As “everybody knows” your business won’t work, they won’t waste much time monitoring what you are doing. If you do achieve some initial success, you are judged lucky, not good, and potential rivals will give you a lot of latitude to entrench yourself while persuading themselves your achievements are temporary and your comeuppance is nigh. Never underestimate the competitive advantage of being underestimated. It gives you considerable lead time before challengers decide they ought to start paying attention to you.
What about the other case, where you read that another firm is doing something very similar to what you have in mind, and perhaps you even discover that they have secured a key customer, strategic partner, or investor you were targeting? Is there a silver lining to what would appear to be a dark cloud? In my view, that depends on how much you are able to learn.
Imagine, for example, that you are golfing in a foursome on a windy day. Would you rather tee off first? I wouldn’t. I’d much prefer to let as many of my partners as possible hit their first drive ahead of me, so I have more information about how the wind is blowing and whether the grass is allowing for much roll that day. Similarly, if someone else pioneers an idea similar to yours and you are able to observe what they are doing, you’re better off than you would be if you are the guinea pig and everyone else is learning from your experience.
That’s not to say you should wait endlessly in hopes you’ll learn more and more the longer you delay. Getting things done swiftly is usually an advantage, which is why Napoleon said, “I may lose a battle, but I shall never lose a minute.” But we must not lose sight of what first-mover advantage really is. Victory goes not to the entrepreneur who enters a market first, but to the first one who gets the business model right. If others attack your prospective customers before you get there, you can still win as long as you find a better approach than those used by the pioneers who precede you.
The unexpected appearance of a competitor can be good news for several reasons beyond the opportunity to learn from your rivals’ experience. First, it validates your niche. If you are the only entrepreneur who sees a particular opportunity, others whose support you need must always take seriously the plausible hypothesis that you are mad. As soon as other firms begin competing with you, the debate switches from whether your idea is viable at all to which challenger has the best offering.
Second, prospective customers like to feel they have choices. Particularly if you are selling to sophisticated users or to purchasing departments, they prefer to line up alternatives, compare benefits side by side, and feel they have chosen the one that fits them best. Whenever people feel they have no alternatives, they are much more prone to question their choices later. If there are some teething problems with your product or service, they are more likely to wonder whether they made a mistake in buying from you. Customers who believe they have a viable second source are more willing to risk working with an unproven startup company.
Third, when rivals enter and start building networks, a competitive dynamic emerges that can operate in your favor. Imagine, for example, that a Japanese company announces it has invested several million dollars into a startup. You can expect the executives of its rivals to start asking, “Are they going to get a lead on us when this space matures?” If these executives haven’t been searching for possible investments to keep open their options, they will start; if they have been searching already, they will now feel a new sense of urgency. The same can be true for venture capital funds, distribution channels, strategic allies, vendors, and the rest of the ecosystem you must build around yourself for your young enterprise to succeed. You’ll have to demonstrate to third parties that you are approaching the space in a different and better way, but you can expect them to lean forward and listen to you with more interest when their rivals are backing your rivals.
In the medium run, an entrepreneurial venture should always aim to be the recognized #1 in its niche. There is a huge difference in valuation between being first and being second. In cases where network effects predominate — such as the GupShup case in this month’s issue of DARE — the first firm to get traction can be hard to dislodge. But don’t feel dismayed when you realize you have more competitors than you initially thought. If you differentiate and learn from them, a race against others can take you further, faster than a race against yourself.
The author is INSEAD Alumni Fund Professor of Entrepreneurship, Director, Rudolf and Valeria Maag International Center for Entrepreneurship and Director, 3i Venturelab
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written by M A J Jeyaseelan, September 11, 2009
1) Never pin your project on a single idea. On the other hand, look at creating a full system. Single incremental ideas keep occurring to almost everyone. If you are keen on commercializing any, then have the patience to build a lot of other things that would make that idea stand out and succeed. After all there are Windows, MAC and a whole list of Linux versions co-existing and thriving in their own way. In my view complete alternatives have an in built success mantra. Do not rush to the market. Take time to add more value to your core idea and differentiate it from the rest by way of innovative value addition.
2) Competition is something that you should be prepared for really very early. It might not be in the form of alternative product but the power of all other products or services that you would be substituting. Customers would need to be prepared to switch over from something that is existing. Even if it is paper based system that you are replacing with a software based system, there would be vested interests who would profit from the existing arrangements. Never be afraid of competition but ready yourself subtly but patiently. There is always room for for more than one in every domain. Perhaps you would need just to redefine your target market.
It really does not matter, it has been done before. If it has been done before, you can always do it better. That is the spirit of innovation
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