First to Market vs First to Mass Market
Is it better to be the first to market ("first mover advantage"), or to be a fast-follower, and come along with a better product once a market has been created? I was reminded of this debate recently, reading 'The 30 Best Pieces of Advice for Entrepreneurs in 2013' from First Round Capital. Tip number 2:
You don’t have to be first to market to win.
Dropbox Founder and CEO Drew Houston should know. By the time he applied to Y Combinator, cloud storage was already a crowded space. But he wasn’t deterred. While many entrepreneurs assume they have to be first to market to win in a category, this is almost never the case. Just look at how Google trounced Alta Vista, Yahoo, and Ask Jeeves. “The fact is that there’s a problem with being first,” Houston says. “You create a market, and if you’re too early, you essentially leave the door open behind you for someone else to do it better.” So he tuned out the naysayers, and 200 million users later, Dropbox is in the lead.
This sounds great, but is it really just as simple as 'someone else doing it better'? If that's the case, surely all it takes to displace the most recent winner is for someone else to come even later, with an even better product. But that doesn't seem to happen. Instead, there seems to be one final winner of a market, and then that winner stays there on top, sometimes for decades. And often with a product that ends up falling far short of more modern standards. But it still keeps on winning. (See Peter Thiel's class notes from CS183: Startup for more on this subject)
It's easy to look at Facebook, Google, Dropbox etc now and be amazed at how superior they are to the multitude of early competitors that existed in their markets. But they didn't start that way. All of them started with relatively simplistic products, often less featured than competitors.
There wasn't a single mainstream social network before Facebook
There were a lot of social networks before Facebook. Faceparty, Friendster, Myspace etc. Facebook executed very well in terms of building their core technology (whereas Friendster had issues with their fast growth). But they also hit the market at the right time, and managed to capitilize and execute on that growth in the right way in order to reach a mainstream audience, giving them a mass market majority that now makes them unstoppable at being a general social network.
Peak MySpace users: 75.9 million in December 2008
Peak Friendster users: ~100 million
Current Facebook users: 1.3 billion
The market adoption they have reached is over 10x any of their early competitors. It's possible that had Friendster, MySpace etc executed better they could have reached this position, but they didn't, and Facebook was the first to capture the truly mainstream market.
Similarly, there were a lot of search engines before Google. But all of them peaked in a period before mainstream broadband adoption. Google, however, executed their core product superbly while growing along with the rise in mainstream broadband adoption. They built a dominant position in the mainstream market that no search engine had ever captured before (reaching over a billion users in 2011).
Technology adoption curve
In many ways this is just a slant on the technology adoption lifecycle. As Geoffrey Moore wrote about in Crossing the Chasm, there is a significant gap between the early adopter market and the mainstream market. Being successful with early adopters does not guarantee mainstream market success; and most start-ups die in the attempt.
Although success with early adopters (who are eager to try new things) is usually an essential precursor, the mainstream market works differently. They require social proof from people like them. In the B2B world, this means that to get mainstream buyers in a particular market, you need to show other mainstream customers in that market. For consumers, your mum probably won't pay attention to a tech-geek saying he's found a powerful new search engine, but would pay attention to a recommendation from a friend who was similar to her. This is why creating a social app that relies on network effects for most of its value is so difficult.
It's a chicken and egg situation that every successful start-up has to get past. But as my friend Zander Rafael likes to say, 'screw the chicken, make an egg'. Doing non-scalable activities that don't make long-term sense often fit this bill - Paul Graham has a good post on this subject.
Can you displace a dominant mass market company?
Once a company reaches a near-monopoly position in the mass market, they are almost impossible to displace. If you were to try to build a better search engine today, it would be incredibly hard–not least because Google already empoyes the majority of the world's top search engineers. They are relentlessly improving their product (even though they already own the market) which means new entrants will find it almost impossible to win head-on. They can out-spend, out-hire, and out-market anyone that tries to attack them. A company that reaches this position is highly likely to be remain extremely valuable for decades.
The company can only really be displaced by changing behaviours, or creating new products that re-segment the market in some way (e.g. new tech offering slightly lower performance but with a dramatically lower price). You can't build a better social network... but you might build another way of connecting with friends, using photos on a smart phone, that works differently (Instagram). You can't build a better search engine, but could you build a different way of finding information altogether (Google are trying to preempt this with Google Now). The reason it can be difficult for already succesful companies to compete with new or segmented markets is described in The Innovator's Dilemma, another must-read for technology entrepreneurs and executives.
Being the first to do a product isn't the most important. It's being the first to get a product past the early adopter curve and into the mainstream market. Doing that depends not just on building a superior product, and operational excellence, but also on ensuring you don't suffer from external constraints (eg mass adoption of the required underlying technology, or a behavioural shift), which is another way of saying getting the timing right. If you can be the first to do that, and build a dominant market position, you will build a hugely valuable and sustainable business. And if you continue to execute (hiring the best engineers, constantly improving your product and business) you will be impossible to touch. Until the innovator's dilemma kicks in, and a plucky entrepreneur changes the game.
Thank you to Zander Rafael and Kieran O'Neill for reading and giving feedback on this post.
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