How to Start a Startup is a multi-part series on the intricacies of creating, sustaining and dominating the startup sphere derived from Y Combinator’s Lecture Series
Welcome to Startup 101. In Part 5 of our series, we discussed user growth and the different methods one can use to achieve it. In this part, we will discuss the nature of competition and whether it is important or not in the startup market.
Leo Tolstoy’s 1875 novel Anna Karenina starts off saying, “All happy families are alike and each unhappy family is unhappy in its own way.” This thought in business falls flat because all happy families are happy because they are unique in their own little way. The families that are unhappy are so because they haven’t been able to escape the vital sameness that their competition possesses as well.
Many successful businessmen share the same belief that one should be able to create a product that stands out from among the rest of the competitors. This is what we call product differentiation. Peter Thiel, of PayPal and Warren Buffett of Berkshire Hathaway both share this belief of trying to be part of the “Monopoly Theory”. The idea is to start a business in an area where you can avoid competition. A good business is one that can differentiate itself from other competitors in a way that the others cannot imitate your product. This might mean having better technology (like a patent, for example) or other intangible benefits. That’s why it’s never good to have competitors for your business’ sake and hence we say – Competition Is For Losers.
Quantify Your Greed
The smartest way to go about this is to choose what percentage of what market you want to capture. So to create a valuable product, you have to create something both having some value a well as something that captures some fraction of the value of what you’ve created. An often stated example is the Airline industry. It is a huge market, but given the high overhead costs it is a terrible marketplace for one to be a stakeholder in. Compare that to the Credit Card industry. It has only two major players (Visa & MasterCard) and some other fringe players. In this industry, these two players often play by each other’s rules and make tons of money. So, you can see the advantage of a duopoly (a market with less competitors) goes ahead.
In reality, if one has a binary view, there are only two types of marketplaces irrespective of what your textbooks suggest: one is perfectly competitive (enough buyers and sellers to keep the market afloat with everyone, competition keeps the market healthy etc.) and the other are monopolies. But the contrast is not always understood because people lie about the nature of the business they’re in. It is one of the most important business ideas that people fail to understand.
A Market Of Lies
Often a company masks the fact that it is a monopoly – mostly to avoid the attention of regulators like the government. So anyone who is in a monopoly of the market will pretend that they have an incredible amount of competition. On the other hand, if a company is in an incredibly competitive market, it will try to suggest it has a monopoly because the need of differentiation to make one’s product stand out is so high. So, there are two different lies being propagated in this business world. Learn to read between the lines.
One of the ways to build a monopoly is to try and grab the small markets. By starting off in a small market, one can take over the market and over time one will find ways to expand that market in concentric circles. PayTm is a great example of starting off from a small market and growing in concentric circles. They started with a prepaid mobile recharge product, gained traction for these high frequency transaction service, established a decent credibility for saving user credit cards, and pivoted to become an eCommerce player in 2014.
The thing that’s always a mistake is to go after a giant market on day 1 itself. That shows that an entrepreneur has failed to define its market, which just eventually means a lot of competition one way or another in the marketplace. Peter Thiel, cofounder of PayPal and part of the famous PayPal Mafia says, “You don’t want to be the fourth online pet food company. You don’t want to be the tenth solar panel company. You don’t want to be the hundredth restaurant in Palo Alto.
You want to be a one of a kind company. You want to be the only player in a small ecosystem.”
Advantages Of Being The Last Mover
There is a distinct advantage in being either the first mover in a market as well as being the last mover. Take Microsoft for example. In the operating system sphere, there were many OS products before them, but having moved in last and having bought in such a diverse set of functions in their product, Microsoft stood the test of time. Similarly, Google was the last search engine. For Facebook to be considered overly successful, it must be the last social networking site ever – which as of now it is and is therefore considered successful. One one way to think of this last mover value is this idea that most of the value in these companies exists far in the future.
Therefore, if we went back to the idea of monopoly – the successes in each industry are actually around 2-3% of all companies that attempted to make a stranglehold on the market.
This will sound somewhat counterintuitive, considering it’s coming so late in this post, but the only method competition actually helps a company in any way, is that it validates the fact that a market for a particular good exists. Perhaps the best way to end this lesson is with a Peter Thiel quote to think about, “ Don’t always go through the tiny little door that everyone’s trying to rush through, maybe go around the corner and go through the vast gate that nobody is taking.”
These tips and tricks help budding entrepreneurs understand what they’re getting into. In part 7, we will discuss the overview of growth as a whole in a startup.