The first mover’s advantages vs. fast followers’ advantages

 

footraceBack in the late ’90s during the dot.com boom everyone was trying to be first to market to gain first mover advantages. But what are those advantages?

  • Media relations – if you are first to market you are bound to garner more press and other media’s attention than being seen as an “also ran”.
  • If your market is not growing, then market share becomes a zero-sum game. Thus by being a first mover you may able to grab more market share, or at least grab the low hanging fruit first. Those following you will have to fight harder to gain share in a static market.
  • Attracting talent. Engineers like to be with “hot” companies, as they assume those companies will grow the fastest, exit the fastest, and make them richer than a following company.
  • Partnering – by being first to market you will have the pick of distribution, marketing, and other types of partners.
  • Exclusivity – you may be able to forge exclusive agreements with suppliers, partners and even customers, thus shutting out companies that follow you.
  • Intellectual property – if you can both file first and apply your patent first you may well get that patent or patents granted, potentially shutting out or slowing down competitors.

Going first seems like the smart strategy. But why is that behemoth companies like Apple and Microsoft are fast followers? For example, the iPhone was not the first smart phone, but it was the first to elegantly integrate the touch screen UI into a sleek form factor that enabled users to surf the web, send messages, take photos, listen to music and even make phone calls. So what are the advantages for fast followers?

  • The saying that “pioneers are the ones that get the arrows in the back” has some truth to it. There are all sorts of issues that a first mover can’t foresee that can trip them up, from government regulations to new technical standards.
  • Fast followers can sit back and see if there’s actually a market for the first mover’s product. Perhaps it is too small to bother with. Or it may be the wave of the future, as the cloud is. Amazon gained first mover advantage with AWS, but Microsoft, is closing fast from the fast follower position.
  • Fast followers can observe customer behavior: what do customers like about the first mover’s new product? What don’t they like? What features aren’t even used? What features are missing? Is it performance or a slick UI that attracts customers?
  • Determining the right business model is one of the toughest problems innovators face. By being a fast follower you can study the market and see if the pioneer’s business model is working. Perhaps the first movers try to price their product a la carte, but the fast follower sees that a subscription model would work better. First movers are then faced with having to change their business model, which may upset customers, whereas the fast followers can launch with the right business model in place.
  • Setting pricing is another one of the tough problem the first mover’s face with their new product. Perhaps they have priced the product too high, which leaves room for fast follower’s to undercut the market leader. Or perhaps the first mover looks like they have left money on the table, enabling fast followers to start with higher prices without having to deal with customers who object to price increases.
  • What’s the USP (unique selling proposition) for customers? Fast followers can observe the market and see if the pioneers had an effective USP or if that prize is still up for grabs.

You see that the list of advantages for fast followers is longer than that for first movers. But don’t be fooled by the number of bullet points. Analyze your market and your customers’ behavior. Typically it is large, established companies like Apple and Microsoft that are the fast followers. The bigger the company the slower they tend to move, and they are typically risk-averse. This is why startups often defeat large companies with more resources. As Kris Kristofferson sang, “If you ain’t got nothin’, you got nothin’ to lose.”

Whether you chose to be a first mover or a fast follower, be aware of the advantages you may have, but also the disadvantages and make the trade-offs strategically. Too many startups just assume they need to be first movers, only to establish a market that bigger companies then enter with more resources and market power. And whatever you do, if you are successful you will have imitators. You need to build a sustainable competitive advantage, such as patents or exclusive distribution agreements. While there can only be one first mover, there can be dozens of fast followers!

Companies with great go-to-new-market strategies

As I’ve no doubt mentioned before, a very common problem with the founders whom I see is that they always want to boil the ocean. I encourage them to start by boiling a teaspoon! If they succeed there they can move up to a cup, then a pint, and so on. There are three mega-successful companies who have expanded to adjacent markets over time with brilliant go-to-new-market strategies.

Microsoft

In 1975 Paul Allen and Bill Gates founded Microsoft with a grand vision of Microsoft products in every business and in every home. A great vision that, of course, missed mobile. And interestingly enough forty-four years later, they are still missing in action in the mobile market.

But Bill and Paul started with the proverbial teaspoon: focused exclusively on programmers, for what were then called microcomputers. Being programmers themselves then knew their market cold. And they started with a single and relatively simple product, porting the BASIC programming language, developed by John Kemeny for Dartmouth students, to the first microcomputer, the Altair. Microsoft dominated the market for programming languages for microcomputers, in fact they had a monopoly. I can’t even remember who was in second place. Bill Gates was incredibly shrewd. When IBM came calling for an operating system for their then secret PC, codenamed the Peanut, instead of turning IBM away because they hadn’t developed an OS themselves, they cleverly purchased an OS from a developer practically down the street, did some polishing around the edges, and created PC-DOS for IBM. But brilliantly Microsoft managed to keep all rights to the software and thus created MS-DOS, which they licensed to all the IBM clones. Talk about a monopoly! For decades no one challenged Microsoft and MS-DOS. The point of the Microsoft story is they took what they learned from developing and selling programming languages to a huge adjacent market, operating systems; from which they expanded to yet another gigantic adjacent market, tools for knowledge workers, AKA, Microsoft Office. The rest was history – you can read it elsewhere, which I recommend you do.

Facebook

Microsoft is ancient history to virtually all my mentees who weren’t even born when Microsoft was founded, let alone when IBM helped make them a colossus. So what’s another example of a more modern go-to-a-new-market company? How about Facebook? Mark Zuckerberg saw how overwhelming demand from customers overwhelmed social network pioneer Friendster, constantly crashing their servers, and angering users to much that they were primed for another, robust social network. So Zuckerberg carefully expanded from his beachhead at Harvard, first to the Ivy League schools; then to other elite universities, like Stanford; then to high schools, and then to anyone with a .edu email account. This phased-in strategy enabled Facebook to build up their data centers in advance of demand, thus ensuring their users a robust app and picking up those users from Friendster as well as those from MySpace, who got tired of the personalized pages that looked like crazed graffiti walls. Of course, Zuckerberg was far from done.  Finally, confident that his data centers had the capacity, he let in anyone with an email account who was willing to use their real name – no anonymity was allowed on Facebook. Again, the rest is history (though some of it has proved to have a very dark side).

Netflix

Another great example of a company that found a niche and dominated it before they expanded to a new market, or in Netflix’s case a new mode of delivering its products to its customers. Netflix was founded in 1997 by Reed Hastings and Mark Rudolph. The niche they chose to start with was heavy users of video disks who were getting tired of paying late return fees to Blockbuster and other video stores that rented movies and TV shows on video disks. Again, my mentees might not be old enough to remember Netflix’s ubiquitous red envelopes they used to mail their rental disks back and forth to users.  Netflix solved a huge problem for users – no more late return fees! And you could keep those movies as long as you wanted. My family had a subscription for three movies at at time each month. When we returned one movie we could get another. But Netflix was not satisfied with this clunky way to deliver movies and TV shows to its users. The MP3 file format had enabled first downloads, then streaming for music. Video streaming was not that far behind and Netflix jumped on that technology with both feet. Now their users could get instant gratification, and no more fussing with those red envelopes! And while Netflix focused only on the U.S., the advent of streaming has enabled them to expand into the huge international market.

So while each of these three companies started with different customers and then expanded to new markets very differently, they all moved strategically into adjacent markets only when they had dominated their initial niche market.

You too can find a unserved niche market. My mentee venture Candorful helps returning veterans nail the job interview, even though most vets have never even had a job interview before. Candorful started with a focus only on returning vets, but soon realized that the spouses of those vets were also needed help landing jobs. So you don’t have to be a Microsoft, Facebook, or Netflix to find a niche and start by serving it extremely well. Candorful is just the most recent example I can give, some others are still in stealth mode. But if they can do it so can you: focus on a niche market before you expand to an adjacent market. Only expand to a new, adjacent market when you dominate your niche.

 

How a strong, clear vision can help you focus

focus

I find founders have a lot of trouble focusing. For one, on their target market. Everyone wants to boil the ocean; start by trying to boil a teaspoon! For another, startup founders often seem to think they can support two different products at the same time. No you can’t, as Scott MacNealy said, “Put all your wood behind one arrowhead.” As a founder you need to be ruthless and ruthlessly focused, that can mean killing your babies, as in backburning a pet product to put 100% of your focus on the product with the best chance of getting near term traction.

But like so much mentor advice, focusing is so much harder for the founder to enact than for the mentor to say.

Inc has a great Q & A on focus with Jeff Bezos, who has done an incredible job of first focusing on a single beachhead market, books, then moving to adjacent market, CDs; then another adjacent market, DVDs; and so on, as Amazon conquers the world of retail.

In a world that’s filled with more distraction than ever, how can you achieve greater focus?

That’s a question Amazon CEO Jeff Bezos touched on in a recent interview in New York. At a private event for The Wings Club, a global society of aviation professionals, Bezos spoke primarily about his private aerospace company, Blue Origin, and its plans for the future.

 

Towards the end, the moderator asked Bezos how he manages to stay focused on such a tremendous, long-term vision, to which he replied with the following:

“Vision is absolutely important, but it doesn’t deserve your day-to-day attention. You need a vision, then, that’s a touchstone: It’s something you can always come back to if you ever get confused. But mostly, your time should be spent on things that are happening today, this year, maybe in the next 2 or 3 years.”

Bezos then concluded with these two powerful sentences:

“So I would always encourage people to hold, powerfully, [to] a vision and be so stubborn of it. Don’t let anybody move you off of your vision.”

So there you have it from one of the world’s greatest entrepreneurs. I strongly recommend you read the entire article, by Justin Bariso entitled It Took Jeff Bezos Exactly 2 Sentences to Teach a Major Lesson in Achieving Great Focus subtitled Whether you’re running a company, working for yourself, or leading a team, there’s a lot to be learned from this simple advice.

You need a mission as well as a vision. And what’s the difference?

Your vision should be the overarching goal, the established purpose and objective of an organization (or an individual).

While vision could include a company’s mission, it goes further. Mission generally describes what you are currently doing; vision goes into the future and describes what you hope to accomplish.

For people buying a house or condo, what’s are the three most important factors to consider? Location, location, location, goes the old real estate saw. For startups, it’s focus, focus, and focus.

 

Why a giant market is no longer enough

 

nvidiaThe received wisdom on startups is that you need a very large market – at least $1 billion – if you are going to build the size company VCs expect. But there’s another important factor to a large and growing market: volatility.

The article in The Wall Street Journal is a perfect example of this issue: Nvidia Lowers Guidance on Weakness in Gaming, Datacenter Businesses, subtitled Chip maker calls latest quarter ‘unusually turbulent,’ will take about $120 million in charges.

The Santa Clara, Calif., company’s stock sank to $138.01. The shares have fallen further than every other major technology company since an industry rout began in October—a skid that erased more than half of Nvidia’s market value.

Like Apple, Nvidia blamed the slowdown in the Chinese market for its sharply reduced revenue. But that’s not the only issue, a downturn in virtual-currency prices drove cryptomining enthusiastsfrom that market, leaving Nvidia with excess inventory.

And while the article doesn’t go into any detail, Nvidia’s products have been key components in gaming PCs and a weakness in that market has hurt Nvidia’s revenues.

And Nvidia had problems in yet another market:

Nvidia also said it didn’t close as many deals as it had expected in the last month of the quarter for its chips used in data centers.

That business had been a major draw for investors, Mr. Rasgon said, but given the limited number of large cloud-computing players, revenue from the business was “lumpy under the best of circumstances.”

So what will Nvidia do as three of its markets take major hits, tell investors there’s yet another market that will drive sales: “Nvidia said it remains well-positioned as a supplier for artificial-intelligence-driven and high-performance computing, which it said represents a large market.” But how credible is that projection given they failed to project the downturns in the Chinese, crypto-mining, gaming, and data center markets?

So what’s the lesson for founders here? Consider the stability and volatility of the markets you are targeting. Large markets are not sufficient, they need to be growing markets. And even large, growing markets are not sufficient, they should have low volatility as well.

This is far easier said than done of course; if large, mature companies like Apple and Nvidia can be hammered by unforecast downturns in their key markets how can startups avoid this problem? Well you are again forecasting the future, the best you can do is to study the history of your market and look at new factors – such as a megatrend like machine learning or the Chinese governments increasing control of its tech companies – and how they will effect your target market.

Globalization and the rapid rates of technological change are disrupting markets as never before, but as you present your market opportunity and revenue forecasts to investors make sure you include projected stability of your market – large size and rapid growth are no longer enough.

Can you predict the future?

crystal ballIf so, perhaps you should play the stock market not start a company. But doing either requires predicting the future. And in the latter case, which interests us, perhaps what is more important is that you can convince others that you can predict the future: employees, investors, customers. I’ve posted about this subject before, How to invent the future, about two videos of Alan Kay about predicting the future. That was two years ago, but they are still recommended viewing!

Today’s article in The New York Times by Mike Isaac and Kate Conger As I.P.O. Approaches, Lyft’s Chief Is Nudged Into the Spotlight it was really about the contrasting personalities of Lyft’s CEO and President. It turns out that Lyft’s President is the extrovert and the CEO is the introvert, in a reversal of the typical personality assignments. That’s about all you need to know. 

But the article ended with a great quote from a 2017 interview with CEO Logan Green:

“As an entrepreneur, you always kind of want what you’re pitching to sound somewhat off the wall,” he said. “You’re trying to pitch the future that doesn’t exist, and you want it to be — it needs to be — a little bit of a stretch.”

Thus the writers left the most important lesson for founders for last. Here’s a few random notes about predicting the future for founders:

  • Linear extrapolation won’t work. Saying that there will just be more of something, more teenagers, more fishermen, more whatever won’t get you very far with your audience.
  • Investors and others look for disruption. What is that? A real phase change in a current industry, like Uber, Lyft and driverless cars. Why is disruption so important? For one thing is knocks the incumbent companies for a loop. They go from competitors to also-rans. At least until they wake up and start buying startups, as GM did with Cruise. For another it can spur an entire market ecosystem, as Apple’s iPhone has done with the App Store.
  • Riding a mega change wave will work. Zinga’s Farmville game rode the success of Facebook to put games on a totally new platform – the social network. But timing is essential. If you are too early on a megachange, as I was with iShop, a mobile app to help shoppers find what they were looking for built in 2002, the infrastructure just isn’t there to support your product. Similarly if you are too late, building touch screen phones, the competition will but you out of business. Convincing investors and others that one) the mega change – whether it be in technology, government regulation or consumer behavior will enable your product and two) you have the exquisite go to market timing to avoid the two dangers of mistimed market entry.
  • The accelerator and the gas pedal. The ideal founder partnership is composed of the visionary extrovert who can influence all stakeholders that he’s right about their vision of the future and the operations expert who has the chops to actually make it happen.  Don’t try to be Elon Musk – for every singleton founder there are dozens or hundreds of founder teams. Investors and others have to make two major decisions: one, is your idea truly groundbreaking and two) are you the right guys to execute it?
  • Finding a problem that technology hasn’t touched yet. Truck driving seems very mundane. But in actuality its very important as huge amount of goods are delivered by trucks every day.  Choosing to make trucks driverless as Ike has meets two important criteria: it rides the mega wave of driverless vehicles pioneered by Uber and Lyft and while fleet owners can’t find enough qualified truck drivers they haven’t used technology to solve their problem.
  • The mustier the industry the better! Whether it’s shaving with Harry or truck driving with Ike, these industries have remained basically unchanged for decades. And in the case of Harry it was the business model, not technology, that disrupted this very large but very crusty industry.
  • Work backwards. Start your presentations with your vision of the future. You used to have 15 seconds to capture your audience’s attention, now I think it’s six. Once you have predicted a future you are off to a great start, but you are far from done. Drawing a semi-plausible roadmap on how you’ll get to that future is the next step.

Predicting the future isn’t easy. Just check out how monkeys throwing darts have fared against professional stock pickers, or the percent of startups that fail. But without a compelling vision of the future you will have a hard time attracting partners, staff, investors and most important of all, customers. Let’s face it, the present is boring. It’s the future that exciting, sexy, and attractive.

 

 

Knowing when to hold ’em and when to fold ’em

 

losing handI’ve started a lot more companies than I’ve finished. That’s undoubtedly because my business ideas weren’t very good. I’m a journeyman entrepreneur, just like Bill Parcells, Bill Cowher and tons of other coaches were journeyman players. I made it to the major leagues several times but just hit a few singles.

So net net I have as much experience closing companies as starting them! The Forbes article 13 Signs That You Should Walk Away From Your Startup Business is a pretty comprehensive list from members of the Forbes Coaches Council. Rather than annotate or reiterate this list I’ll just provide a few reasons that aren’t touched upon by the Forbes Council.

First of all if you have actually started a business there a lot more people involved than just you: management team, staff, investors, customers, advisors, and friends of the company. You need to judge your impact on these stakeholders. You might even seek their counsel if you are on the fence about your decision. But that’s a very delicate path as you could panic people. Best to find advice that is not connected to the company. And are you walking away from the company or from being an entrepreneur? If you leave your team and investors in the lurch you may be doing the latter.

You may have fans but not customers. I’ve made this mistake more than once. It doesn’t matter how many people think your idea is great and love what you are doing. What matters is paying customers and repeat business. Don’t let yourself be fooled by good reviews by the critics; numbers don’t lie.

You reach a stalemate with your co-founder. While we agreed that my original business plan wasn’t working our agreement stopped there. He wanted to go in one direction, I wanted to go in a totally different direction. Similarly you may be at loggerheads with your investors. It can then be better to walk away, gracefully, so you can get to play another day. (It turned out we were both wrong, but because he stuck it out he ended up winning at the end of the day with yet a fourth direction.)

There’s a competitor you can’t seem to beat. I made the mistake of somehow missing a competitor that was even in my same neck of the woods.  Once I saw the head start, customer base, and reputation this company had it was clear to me that we were so far behind them it was unlikely we could catch up. The investors appreciated my willingness to shut the company down rather than trying to raise more money and we parted on good terms.

Your original business model is wrong and you can’t find a new one. Business model is just bus speak for how you make money. If the assumptions you made about who will pay you and how turn out to be wrong often you can pivot. But I’ve seen companies pivot so much they get dizzy. This behavior, otherwise known as thrashing, a term borrowed from software development, is a strong signal you need to shut things down.

As the saying goes, if you fail, just fail harder the next time.

Raising capital for a not-for-profit company

newmanitarianwebsiteheaderI’ve worked with and for a number of not-for-proft companies in my career, but I’ve never been responsible for raising the capital for their operating costs. Aside from writing several successful grant applications for the Watertown Free Public Library, I’ve not raised a significant amount of capital for a non-profit. But I am familiar with the various approaches which I’ll recap here as they may be helpful to those few startups that choose the non-profit route. We see very, very few non-profits at MIT VMS, though many of the startups are focused on social impact.

One major difference between for profits and non-profits when it comes to raising capital is that non-profits have no stock to sell. So that eliminates investment and no return on capital – period. No vcs, no angels, no convertible debt. So how do you raise money?

The most important thing to keep in mind is that non-profits must get a 501 (c) (3) designation from the IRS. In short this enables donors to deduct their donations from their income taxes. It is very hard to raise capital for a non-profit without a 501 (c) 3 classification from the IRS. Unfortunately in my experience it can take 6 months or more to get the charitable designation from the IRS. There is a workaround as founders can route donations through another 501 (c) (3) corporation. Startups in Massachusetts affiliated with MassChallenge are able to use MassChallenge in this manner. However, it is just a short term fix. It appears that the current partial government shut down may affect the IRS and slow down 501 (c) (3) applications or halt them completely until the federal government fully reopens.

So where does a 501 (c) (3) corporation go for funding?

Friends and Family

This tried and true method of fund raising has been used by for-profit companies forever. While friends and family may feel better investing in a charitable organization those funds are not really an investment as there is no mechanism for a return, it’s really a charitable donation.

Foundations

Foundations like the Bill and Melinda Gates Foundation grant billions of dollars every year to non-profits. However, there are at least two problems with foundation grants. One, many of these grants are one-time grants. It is difficult to get multi-year grants. So that leaves non-profts in the position of having to constantly raise money. The other issue is that typically foundations work by the calendar: applications must be submitted by fixed date each year, applications may then take months to be reviewed and more months may go by before a check is cut to the “winning” grant applicants. Many foundations have terms and conditions around their grants and may also require periodic reports on how the grant money is spent.  Preparing and administering foundation grants requires a lot of work on the part of founders. Understand the opportunity cost before embarking on a quest for foundation grants.

Government grants

The best known grants in the tech world are SBIR grants. These Small Business Innovation Research grants can provide valuable support for a startup. I even knew one entrepreneur who had financed his entire company with multiple SBIR grants. I would encourage every startup, not just non-profits, to consider filing for an SBIR grant. Government granting agencies can move even slower than the IRS and require more detailed applications. I would encourage every non-profit to hire someone with deep experience applying for and administering foundation and government grants. They should be able to more than pay for themselves, especially if they are working on a part-time, project basis.

Donations

Wealthy people typically have their own foundations or what is called a family office. I would encourage founders to study up on family offices as many invest in startups and/or make donations to non-profits. Large corporations may set aside a portion of their profits for charitable donations. They key is finding these offices and if possible getting a warm introduction to their administrators.  Again, your non-profit must have a 501 (c) (3) designation to work with a family office.

Work for hire

Just because you are a non-profit it doesn’t mean that you can charge for products or services. It just means that any excess capital beyond your operating costs has to get plowed back into the organization – which could even be salary increases for your staff.  If your non-profit possesses a particular skill such as training teachers, you can run training workshops and charge their parent organizations a fee for the workshops.  You could even develop a product, such as a portable water purifier, which you could sell and use the proceeds to support your organization. Grant making organizations and individual donors tend to look favorably on startup that generate revenue, as donor organizations do not want to be the sole source of support for a non-profit. Similarly they don’t like be the first money it. Thus generating some revenue can be the first money in and encourage foundations to look more favorably on your grant application.

Products

Their is nothing to prevent a non-profit from making and selling products. In fact my absolute favorite charitable organization is the Newman’s Own Foundation, set up by the late actor and run by his daughter. Not only do they give grants they also have created an entire product line of excellent food products – we especially like Newman’s Own salad dressing and frozen pizzas. They have reached a milestone of $535 million in donations!

Non-profts should act like for-profit startups in that they need founders, a fleshed out management team, a great business plan, traction, a customer acquisition plan, etc. One nice thing about non-profits is that while they do compete for grant money, in general they may well be more collaborative and cooperative with other non-profits.

This post would be incomplete without mentioning the Social Innovation Forum, They are a greater Boston organization that helps startups raise capital and increase their social impact. I’ve had the privilege of working with them on founders’ presentations and SIF is an excellent organization which I highly recommend to Boston area non-profts.

My last word on non-profits is that you should acquire and use a .org domain name. .com signals a for-profit company, .org signals a non-profit. Since web and social media are so important in today’s marketing you want to make sure you are viewed as a non-profit from the get-go.