AGILEVC My idle thoughts on tech startups

May 13, 2013

When we meet with entrepreneurs and ask about their competitive advantage or special sauce, one of the common responses is first mover advantage.  “We’re the first company to do X in an rapidly growing market” or similar.

I’ve always felt being the first mover is a comparatively weak advantage and have been thinking about this more recently.  While our portfolio at NextView is roughly equally weighted to consumer facing and B2B companies, it seems that for consumer companies in particular being first mover confers little benefit and the drawbacks probably outweigh whatever weak advantage might exist.

If you think back to the monster consumer software and internet companies that’ve been built in the last 2-3 decades, it’s actually far more likely they were fast and/or particularly innovative followers rather than first movers.

First Movers

  1. Atari (home video game consoles)
  2. Twitter (microblogging)
  3. Amazon (e-commerce)

Fast/Innovative Followers

  1. Microsoft (OS – both text & GUI based, office productivity, game consoles)
  2. Apple (today’s Apple of smartphones & tablets… early Apple’s attempts at being first mover largely flopped like Lisa, Newton, etc)
  3. Facebook (social networking following in the footsteps of Friendster, MySpace, etc)
  4. Dropbox (cloud storage)
  5. Netflix (video streaming)
  6. Google (search… lots of predecessors)
  7. Square (card present payments on smartphones - predecessors like ROAM Data, et al)

The one segment of consumer companies where being first mover seems to have conferred real advantages has been “collaborative consumption” broadly.  The final chapter has yet to be written for most of these companies but being a first mover does seem to have aided the likes of ZipCar, AirBnB, and Uber.  I think this has less to do with network effects which are distinct from first mover (though the two are complementary) and more to do with locking up preferential access to supply.

So why might it be better to be a fast follower?

  • Don’t Have to Evangelize - Perhaps the key downside of being first mover with a consumer product is having to evangelize a market and build it from a niche to broad adoption. This usually takes a lot of time, money, and energy. Evangelizing towards a mass market is arguably harder in consumer than B2B given individual consumers adopt based on a broader set of qualitative and quantifiable factors, where as businesses often attempt to quantify ROI more objectively. Google didn’t have to convince people that Internet search was needed… they just had to make it work better (via PageRank and subsequent innovations) and monetize it better (by copying GoTo/Overture with paid search advertising).
  • Work Out Early Kinks - Dropbox wasn’t the first consumer cloud storage service.  Companies like xDrive and others let you upload and retrieve files from the web nearly a decade earlier, and there were others like Carbonite that created hybrid local/cloud storage solutions.  But Dropbox realized that one of the kinks of existing cloud storage services was that they were only well suited for alternate or backup storage, not primary storage. For the cloud to work seamlessly for primary storage Dropbox built client side products for an array of platforms, and worked very hard to make this client experience feel super native on every one. By finding a way to work out out this kink they’ve grown larger than all the other consumer cloud storage products out there.
  • Wait For Complementary Technologies to Mature - Apple didn’t pioneer the smartphone but obviously the iPhone rightly deserves credit for defining the category and making it a global mass market.  Of course Apple did some truly innovative things with the first gen iPhone launched in 2007 and also harmonized software and hardware better than anyone else. But part of their success was simply due to the vastly improved state of cellular data networks relative to when the first smartphones emerged. The Treo was a revolutionary device, but using one kinda sucked in the early days of digital cell networks.  Similarly RIM had to build their own proprietary data network (after initially launching on Motorola’s ARDIS/DataTAC network) in order to get emails to Blackberries in a reliable and timely manner.

We sometimes think of being a fast follower in pejorative terms. Somehow first mover seems sexier, and to be fair some first mover startups have become category leaders or have successful acquisitions by larger companies. But the reality is that most fast followers are incredibly innovative companies, sometimes even more so than the early pioneers in their category. And at the end of the day most great entrepreneurs are focused on trying to build enduring, category defining companies. Being a fast, innovative follower might be the way to go…

  • Graysilk

    There are select other plays in which it “first mover” greatly exceeds “fast follower;” as when
    establishing a new market. Defining/evangelizing a new market is rarely fun nor easy. However, if there’s pent-up demand or a solid value proposition and the market “takes,” sellers naturally seek-and-hold to the resource with the most buyers, and buyers seek the resource with the most diverse/competitive sellers. It’s an effective monopoly that’s tough to crack. eBay’s a great example. There are plenty of auction sites, many arguably “better” (or at least less costly) than eBay. However, eBay’s not going anywhere unless large forces collude. -Jon

    • http://www.agilevc.com/ leehower

      Some good points here Jon. But I’d say eBay’s advantage is from network effects rather than being first mover in online auctions.

      In most networks or marketplaces, the benefit to all existing participants increases with the addition of more participants. While being early in auctions may have helped eBay, at the end of the day it was network effects as they added more buyers which attracted more sellers which attracted more of both. eBay initially got critical mass in collectives like beanie babies etc but then very adeptly parlayed that into many other product categories.

      Same reason Facebook is successful. They were not first mover in social networking, Friender and MySpace preceded them. But as Facebook grew from a college focused network to a broader mass market SNS, new users wanted to go where all their friends were strengthening the value of the network for all.

      • Graysilk

        I may be regarding the term “network
        effect” differently. The dynamic I associate with terms like this
        (and “social”) and is peer-to-peer association, driven by peers
        perceiving a benefit, which also drives platform activity. If I
        understand you correctly, you’re suggesting the “network of
        buyers” attracted a “network of sellers,” but that seems like
        two sets of parties in a traditional buyer/seller relationship; there
        are drives between these parties, but not within or among
        either of them. A brick-and-morter mall has this same dynamic; I’m
        not sure I would apply the term “network effect” there either.
        Facebook exploits a different dynamic; there is indeed a network
        drive for users to actively recruit peers. However, I’m in complete
        agreement with that as a “fast follower” example.

        …And in general agreement with all
        your other points; please excuse me if I’ve made a petty semantic
        point.

        We think a lot about first mover
        advantage when it can be used for monopolistic advantage (as we
        perceive with eBay). Facebook “cracked” social because it was
        “better,” and the barriers for people to switch (or join) are
        low. In a space where a first mover can create something which
        accrues value (such as an attractive new market), and the value of
        this market cannot easily be matched by followers (because users have
        investments with the first mover, and transition barriers are high),
        that is a beautiful set-up.

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  • I'm a former Silicon Valley entrepreneur turned East Coast VC. I co-founded NextView Ventures, a seed-stage VC firm based in Boston, in 2010. Read More »

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