The race is on | Whether you're a first mover or fast follower, beware of the roadblocks in the race for market share
In the venture capital business, timing is everything. As investors, we want to time our commitment to a growth company to its inflection point of growth — in other words, we look for companies that are capable of serving markets that are early enough not to be dominated by big established players but mature enough to have plenty of customers who want to buy.
If we fund a company that is too early to market, then the company tends to need more money to get to that inflection point, and then more money to fund its growth. During the dot-com boom, a great many entrepreneurs talked about the value of being a “first mover” — being the first to market with a new product or service. This was — and still can be — a compelling pitch to many venture capital investors who live for the opportunity to ride the crest of a new wave in an uncharted ocean of opportunity.
Being first means having something no one else has. If you’ve got a product or service that performs better than existing processes or products, if you have a business model that scales quickly, and if you have a team and capital to fuel that growth, being the first mover can catapult you to market leadership in that space.
But like so many aspects of fast-growth companies, being the first to market also carries risk. For example, it means having to grab market share before there is a market to speak of. Being first means that you can’t look to others for the path forward — you’re blazing that trail. Moreover, there are lots of competitors who have a vested interest in slowing your success just long enough for them to lower their prices, develop competitive offerings and tell your prospective customers what’s wrong with what you’re offering.
If that’s not enough, your potential to lead may be limited by your capital base. Run out of money before you’ve let the world know about your better mousetrap — all while beating back assaults from both existing and new competitors — and your dream of capturing a share of the market you helped create may become a nightmare.
Learn from Newton
Early players in pen computing and handheld PDAs learned some hard lessons about being first to market. Take Apple Computer’s Newton, a larger, less elegant precursor to the 3Com’s Palm Pilot. Even though it was a major technical innovation that was a few years before its time, the Newton dropped like a rotten apple, and the company learned some hard lessons about being a first mover in an emerging, undeveloped market.
By contrast, many successful companies have built their success on the basis of being a “fast follower” — watching the first movers learn from their success or failures, and then optimizing their business model based on those results. Fast followers have the opportunity to both outcompete the first follower — whether through better features or a lower price — or approach the market from a different direction by targeting a different market segment. The Palm Pilot was a great example of a fast follower, creating a slimmer, slicker and more effective version of Apple’s Newton. Ironically, Palm itself was nearly put out of business when its enormous success was usurped by the greater functionality of smart phones like the ubiquitous RIM Blackberry. Even more ironic, Apple came back as a fast follower to Blackberry and other smart phones by reinventing the user interface and adding iPod functionality to its iPhones and iTouches. What comes around goes around.
A venture fund I manage invests in both a first mover and a fast follower. The first mover has a breakthrough product that no one else has, with applications that can serve multiple consumer and business markets. We are working hard to analyze the unknown, un-sized potential markets for its product. That’s hard to do because these markets are so new that no one has produced a meaningful market study to help us to choose which market we should pursue. Bet wrong and we risk losing our market opportunity and, likely, our investment.
The fast follower, however, was not the first in its market, but has a much better design than existing competitors and has quickly become the best-of-class in an emerging market. Like the first mover, the company still has the challenge of picking its optimal path to growth and ensuring that it is sufficiently capitalized to realize the potential we all believe is there.
So what’s better — the fast mover or the fast follower? The answer is that both can win. But for either company, winning depends on being well capitalized, as precious few fast-growth companies can live off the cash from early sales while still investing in future growth. It’s also critical to choose a market development strategy that lets you use your precious resources efficiently and with a clear eye toward positioning vis-à-vis competition. After all, having the very best product or service isn’t worth a thing if nobody’s buying.
Michael Gurau, managing general partner of Clear Venture Partners in Portland, can be reached at mg@clearvcs.com.
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