Startups are usually small businesses that take huge risks in identifying an unseen opportunity and being the first to take on that market. While being first comes with its first mover advantages, it also has its first mover disadvantages.
The Yahoo Problem: Lapped By the Competition
Perhaps the quintessential example of being a first mover on the Web is Yahoo, which provided early Web users with the first popular directory and search engine. Yahoo entrenched itself as the one that got there first; along with its easy-to-remember brand name and aggregation of content combine to make it difficult to compete with. For a moment in time, it had total market share, brand domination, press coverage and kept everyone out of the game.
However, in due time, Alta Vista (now defunct), Google and several other companies rose up. They benefitted from not having a huge learning curve, which Yahoo had to conquer. Yahoo might have created the term ‘search engine,’ but its competitors rode on its coat tails and started offering alternate solutions. Eventually, Yahoo started languishing and – while having a second wind now with Marissa Mayer in charge – it has yet to return to its giddy heydays.
First (and Still Best)
Other examples of first mover startups that are now behemoths include Amazon (books) and eBay (online auctions). Although each of these have encountered competition, their early arrival and commitment to becoming the predominant owner of their market has seemed to assure their success.
How is it that these first movers are able to hold on to their crown of leading players in the industry while Yahoo couldn’t? How can a pioneering business ensure its position not just as the first player to start but also remain as the top dog in the industry? Set up barriers to entry.
In theories of competition in economics, barriers to entry are obstacles that make it difficult to enter a given market. Traditionally, this can refer to government regulation, or a large, established firm taking advantage of economies of scale or an established name.
Fending Off the Competition
One of the usual creeds of companies who attempt to be a first mover and command a market is “go big or go home.” Once a first mover has become established, the fact that someone has already arrived becomes in itself a barrier to entry for prospective competitors. First mover startups can do themselves a favor by acquiring customers widely (even as a loss leader) through traditional advertising, digital advertising, marketing, public relations, social media and more. This makes it harder for young upstarts to unseat the incumbent.
Patenting a particular technology is another way to prevent new entrants. Google, Apple, Samsung and other companies fervently apply for patents for technologies; some they can’t even produce yet. This is in the hopes that a competitor will inadvertently launch an idea or a component that infringes on them and suffers the consequences; just look at Apple wining a billion dollar fine from Samsung for imitating the iPhone. This is also done on a rather ridiculous scale, where Apple has repeated failed attempts to patent the word “startup”. First mover startups can identify and patent unique aspects of their product to defend themselves, or go on the attack to limit new entrants to the market.
Similarly, having proprietary technology or designs can lead to licensing dollars. If we were to believe everything in the biopic “Jobs,” Steve Jobs apparently screamed, “You will never make one dollar without me taking 90 cents!” to Bill Gates when he found out Microsoft copied Apple’s word processing software. Apple and Samsung have a love-hate relationship, one where they sue and countersue each other, while Apple relies on Samsung chips to make its iPhones – this way Samsung never really loses. Besides keeping competitors from “stealing,” patents can be licensed out to them. The first mover startup can get paid off competitors’ products, which is in effect a limitation tool that the competitors rely on.
The Most Important Tool of All
The best tool that a first mover can have is momentum. As the first product in the untested market, it is easy to get the initial buzz and hype. The novelty of the product can be trendy and it would seem everywhere you turn you will spot someone with it. Think of “Gangnam Style” by PSY, Slinkys and all the fashion faux pas from the ‘80s. However, the trends stop once it becomes stale and it dies off. For the first mover startup, once the snowball starts, it cannot stop.
Steps to Success
First, achieve the critical mass of users by getting excellent product reviews from customers and the media.
Second, create mechanisms for bulk buying of your product or service in the early days.
Third, sustain the momentum. Never stand still in terms of product features; always focus on customer feedback to continue innovation.
While being the first one to get to the top of the hill is hard, staying on top is even harder. By applying some barriers to entry, it may be possible to stave off the competition for that much longer.