When's it too late to enter a market?
First-mover advantage argues that businesses first to enter a market have an advantage over latecomers. This common-sense idea discourages prospective founders, giving them the impression that they are too late to tackle a problem they’ve identified because someone else got there first. While first-mover advantage exists and has helped some projects establish a lead, there are many counter-examples where very late market entrants have won. In fact, the benefit of being late into a market often outweighs the costs.
If you start a race before your opponents are even on the track, it is logical to expect to come first. But races are poor metaphors for startup and technology competitions. One flaw in this metaphor is that while races have a finish line (once you win, you win), technology competition is ongoing. Some argue that startup building is more like a marathon, but even marathons end. New technology frequently disrupts dominant incumbents of many decades in many markets. A technology race ends only when a new invention renders all players redundant.
In the 2010s, many eagerly watched Sketch, a new MacOS-native application for UX designers, disrupt Adobe’s monopoly in digital design. Their hypothesis was simple: no Adobe application was designed with web or app design as a primary use case. If they could build a new specialised app from the ground up for this market, it would be radically better than Adobe’s generalised designed tools. The secret that undergirded their startup was that the digital design tools race was not over.
Adobe responded to the threat of Sketch with a copycat product. They built a specialised desktop app for the digital design market, but their head of product recently declared this effort a failure. Adobe did not fail because Sketch had a first-mover advantage in the specialised digital design market. They failed because yet another entrant came onto the scene, and they did things completely differently. While Adobe focused on replicating the success of Sketch, Figma reinvented the market again with a cloud-native solution engineered for a multi-player user experience from the ground up. The secret that Figma stumbled upon was that digital design is inherently collaborative, so a radically collaborative solution would invalidate the competition. This new approach was so radical it threatened to disrupt Adobe’s other products enough that they were willing to pay twenty-billion dollars to acquire Figma. Two upstarts reinvented this market in less than a decade by deploying differentiated strategies. The only luxury first-mover advantage afforded anyone was the pocketbook to purchase the competition (something I’m sure Figma shareholders are pleased with).
Like a race, speed is critical to technology competitions. The party that can most rapidly improve has an advantage, which certainly helped Figma. Another lesson from the Adobe example is that, unlike a race, innovation can completely and unexpectedly reset, which has pole position overnight. A single innovation from a competitor can render a leader’s advantage moot. Sketch and Adobe may have been hurtling towards the finish line, but Figma moved the finish line to an entirely new location. They both had to start again to win in this new world. Whenever this happens, startups have an advantage because the bigger the ship, the more difficult it is to turn around. The greater your previous success, the more effort it will take to reinvent your approach.
The best argument in favour of first-mover advantage revolves around network effects. Network effects describe a situation where the value of a product is tied to the number of users it has. The more people use Uber, the more opportunities drivers have to make money. The more money drivers can make, the more attractive to drivers the marketplace is. The more drivers there are on Uber, the better the service will be for passengers (greater supply leads to lower costs and better service). Network effects are challenging to get off the ground, but they can rapidly build momentum and entrench market leadership. A startup would struggle to challenge Uber today because drivers and passengers are incentivised to stick with Uber due the Uber’s scale. Perhaps an incredibly well-funded startup could pay drivers enough to overcome this cold-start problem, but the tide is against them. Technological innovations transforming market dynamics are usually required to disrupt a company with powerful network effects.
In the early 2000s, Apple, Sony, and others fought fiercely for the MP3 player market. This race didn’t stop because Apple won — it stopped because the invention of the smartphone rendered MP3 players entirely irrelevant. A recent and more speculative example is Google: while they have an absolute monopoly in search, and it seems ridiculous to expect a new entrant to beat them in search, many expect the likes of ChatGPT could dramatically reduce the importance of search, disrupting Google along the way.
Being late to a market affords several advantages. Most obviously, you can see what works and doesn’t work by observing the experiments of your competitors — first-movers tend to waste a lot of capital on ideas that don’t pan out. Late entrants will have an easier time selecting technologies and commercial strategies most likely to work. This is the Apple playbook: enter late with the best product.
Your strategy is probably undifferentiated if you compete with an established business and feel like you can’t win because they have more resources or a monopoly on customer attention. If you copy the playbook of whoever is winning the market, you will build an artisanal and mediocre version of what customers can get elsewhere. Differentiation is required to succeed in an established market. Find a way to do things differently. The best way to do this is through new technology disrupting the conventional approach. Another way is to start in a niche: even the most prominent companies cannot create the best solution for every niche covered by their product. If you build something highly specialised, you can satisfy your base better than any juggernaut. From here, you can expand to other niches, and you may discover the next disruptive technology for your market along the way.
Adobe acquires Figma for US$20b. ↩︎
Rapid improvement is about rapid change that has a meaningful, positive impact on business prospects. Superficial change is unhelpful. ↩︎
Many have speculated that self-driving vehicles will disrupt Uber. An automaker with a self-driving technological advantage like Tesla could deploy a fleet of cars that don’t need drivers, radically lowering the costs of taxi-style transport. They could refuse to sell these vehicles to Uber and quickly flip the market dynamics in their favour. This threat is why Uber has invested in self-driving technology. ↩︎
24 April, 2023
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