Ask the general public and they will tell you being the first into a market is the key to winning. But building a company is rarely a linear race. In fact, as many have written, the vast majority of tech giants are actually fast followers. Indeed, first movers educate a market but rarely win it because they are ahead of the curve. Steve Blank for instance wrote famously that “pioneers have arrows in their back.” If you are building a search engine in 1988 when there is barely enough Internet adoption you will fail. If you are building a search engine in 1998 you can become Google, even though there are at least ten others who came in before you. This post will offer a framework on how to succeed as a fast follower aka the second-mover advantage.
1) Disruptive vs Incremental — Winning against a powerful incumbent is not an incremental change but a fundamental improvement. Fax machines, VCRs, and landlines have shrunk substantially in market share because a new technology came along. Uber, DoorDash, and AirBnB don’t own assets like taxi companies, restaurants, and hotels, but leverage them far more efficiently. These types of disruptions in technology or business model are not what we are talking about in being a fast follower. A second-mover advantage is about riding in the tailwinds, typically of another startup that is further along. It could be a few months or years ahead but it’s essentially doing what they are doing better. Eventually a fast follower can do disruptive innovation themselves. Arguably the best case study here is Amazon — it started off like many other ecommerce sites but it just did it better. Jeff Bezos invested continuously in growth, even barely staying profitable much beyond the 1997 IPO. It was only when the company was already a decade old did he arguably purse true disruptive innovation starting with the modern AWS aka a true cloud platform in 2006.
2) Cash Is King, Speed Is Emperor — What do you do to beat someone ahead of you in a race? One time-tested strategy is you burn more fuel. Just like real estate is about location, location, location, when it comes to fundraising it’s about timing, timing, timing. If you are the first company pitching to VCs to be a fast follower you will likely have an easier time fundraising than even the incumbent. If you are the hundredth company pitching then you should probably not even bother. Once you have actually raised the funds entrepreneurs should err on the side of spending. It is not about throwing caution completely to the wind, but it’s certainly about taking bolder risks. You are a consumer company looking to market your product? Spend money. You are a healthcare company looking to jockey amidst bigger names to get a contract? Spend money. You are a robotics company building a prototype? Spend money. If you are in the territory of fast follower you are inherently playing catch up, trying to go beyond early adopters, and speed supersedes cash management.
3) Network Effect — Network effect is often coded as n^2 i.e., that every extra user has an outsized impact on the value of the network. More vendors drive more buyers and vice-versa. Larger contracts add disproportionately to your credibility to get the next contract. Increasing your brand means people gravitate to your products even if the competitors are probably just as good. You would think that first-movers enjoy the biggest benefits of network effects? It’s actually the opposite. Most of the time the first company has to educate the market and faces an uphill battle to get adoption. Those coming after can learn from the successes and failures, skipping the need for as deep of a customer discovery. In fact, the very leader of social networks Facebook was hardly the first, in fact more like the middle of the pack:
The lesson for entrepreneurs is to not conflate invention with innovation — the person who invents something is rarely the one who brings the innovation full-scale to the market.
Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.