Like many others, I’ve been enjoying reading the Peter Thiel class summaries on the Blake Masters blog. There is lots of wisdom captured in the posts, including the fantastic manual on how to pitch VCs, which is a must-read for any entrepreneur.
There has been one idea that I’ve been thinking about for a few days after I read it. From the fourth class entitled “Last Mover Advantage”, the idea discusses the right types of markets for startups to pursue:
The Goldilocks principle is key in choosing the initial market; that market should not be too small or too large. It should be just right. Too small a market means no customers, which is a problem. This was the problem with PayPal’s original idea of beaming money on palm pilots. No one else was doing it, which was good. But no one really needed it done, which was bad.
Markets that are too big are bad for all the reasons discussed above; it’s hard to get a handle on them and they are usually too competitive to make money.
Combining this idea with the notion that the last-mover in a market has an advantage, I can explain many of the biggest Internet successes:
- Google – last mover in search and search ads. The search ads market was roughly half of the $8B market – not too big, not too small.
- Facebook – last mover (at least for now) in social media. Social media ad market was less than $1B when the company started.
- Dropbox – near last mover in consumer storage. The industry was considered unprofitable by investors given Mozy and Carbonite’s trajectories and was at most $2B at the time the company started.
- Apple – near last mover in portable music players and computers. What a turnaround we’ve seen.
Common across all these examples is significant market growth driven by one company who brought much better product design, strategic management and effective sales processes. It’s easy to point to the product differentiation – later founders used previous product generations and built something significantly better. But it’s also easy to overlook the importance that sales had on most of these companies.
- Google had a team which mechanized closing and on-boarding large search partners growing the revenue base dramatically.
- Dropbox focused significant fractions of their engineering team on optimizing conversion-to-paid funnels. And they maxed out the refer-a-friend program.
- Apple built the best retail experiences which today drive a huge, but undisclosed fraction of sales.
All of this ties back to another one of the classes: distribution. More than building great products, the last movers who won knew or figured out how to distribute their products the best. They could see which strategies had worked and which had struggled.
These last movers also had the advantage that they were selling to an educated market. Their end customers were already aware of the problems these companies sought to solve. Online advertising had gained some scale. Online backup was early in its market development. Social networks had been through a few iterations and users were familiar with the concept. And Rio had brought bulky MP3 players to market. This implied some latent market demand for better products and ultimately faster sales cycles.
My take away: When picking your market, make sure it’s not too big, not too small. Make sure you know why your product is better. Then focus on the most effective path of distribution. Lastly, try t o sell to the previously educated customer.
I’m curious also to find counter-examples – companies who were first to market with a product that were eventually massively successful. Do you have any?