9 ms·

Startup Competitive Advantages that Work

211 points by stakent 16y ago

Charuru 16y ago
I like it! These advantages sound very good. But my problem is that these are reformulations of the 'fake' advantages for purposes of marketing to VCs, rather than any substantial actual difference IMO. It seems to me like fake advantages Passion + Feature = Real Adv One Thing and PhDs / MBAs is simply one way of saying Dream Team. I mean as a marketing term 'Dream Team' is even less substantial than PhDs / MBAs.
- smartbear 16y ago
  I would take a proven entrepreneur over an MBA and a proven uber-coder-geek over an MBA any day of the week, and most VCs would too.
  - Charuru 16y ago
    Not a real dichotomy though...
  - lol 16y ago
    Denigrating MBAs is no different than denigrating degrees in CS or CE. The question is always 'what do you bring to the table?' This might illustrate how utterly moronic your statement was: > I would take a proven entrepreneur over a random CS grad and a proven uber-coder-geek over a random CS grad any day of the week, and most VCs would too. Sure... it's still true. But it's only true because your original statement is utter nonsense.
  - deleted 16y ago
    [deleted]
atomical 16y ago
It's good to see someone admit that they didn't have an advantage in the market place and then built something great.
- cookiecaper 16y ago
  I think there's too much focus on initial advantages. There are a lot of people that make a lot of money by starting restaurants, dry cleaners, book stores, and other run-of-the-mill, every-day things in common and saturated markets. The idea that you have to have something earth-shaking to be a successful entrepreneur is far too pervasive, imo. The real thing is that you start, persist, and have some semblance of the skills that you need and a lot of dedication and perseverance.
ohashi 16y ago
He makes a fair point, those are definitely competitive advantages. Now the question becomes, most companies won't have them but they will still be expected. Then what? Of course, where do we draw the line? semi-fame? is that competitive advantage? I have 20,000 twitter followers? 100,000? 1 million? (or mailing list members, rss feed subscribers, whatever metric you want).
dgudkov 16y ago
Good article. Asking questions like "what would you do if someone will fully copy you" is a bit dirty trick. Abstract competitors are always better, so it's meaningless to talk about them. Real competitors, even very smart and mighty, can't cover everything - they must limit themselves to something (market niche, demography, geography, price range etc.), and this may become a chance to avoid competition.
- smartbear 16y ago
  I certainly agree with you in practice. Think of this like an Einstein thought-experiment -- it's not how you should run your life every day, but it's maybe a nice foil for thinking about such things.
jargon 16y ago
None of these are competitive advantages that are the opposite of the suggestions from the previous post about things that are not competitive advantages. There are plenty of people who are passionate about their startups, working in a team of talented people, with customers, and insider information. If a company went to a VC and used these competitive advantages, they'd be shot down in a second. Imagine this scenario: Hi, I'm jargon. I am really super passionate about this idea and it's in my knowledge domain, because I have retail store. I'm a programmer with a retail store who has this software that I wrote to help me manage my retail store. I got 5 other retail stores on my block to buy it because it is so awesome. No other company is going to be able to compete with it, because all I care about is retail store software. Plus, we got Donald Trump to market it for us! What VC in their right mind would ever invest in something like that?
- smartbear 16y ago
  In your italicized text, it was good up until "No other company is going to compete with it." The point isn't that you have no competition, but that you have enough raw material to be competitive yourself. The point isn't that you're guaranteeing success, but that since most pitches (that I see) don't include ANY of the advantages you just listed, those that DO have those advantages look a lot better at the outset. Of course anyone can succeed, and many should try. But that's not how investors think; they think in terms of reducing risk, and things like past success and traction are ways of reducing risk.
- gamble 16y ago
  You're in a pretty sweet position if you can go to an investor and say: 1) I'm an expert in my target market. 2) I have a functional product deployed in a real environment. 3) I have five other customers lined up already. You'd be sitting better than 95% of startups, even if The Donald isn't shilling for you.
- SoftwareMaven 16y ago
  If I could go into my investors with 5 signed contracts and an endorsement from somebody like Donald (assuming it was actually relevant to the product), I can guarantee they would be standing on their seats cheering. Your pitch has outlined very real successes that are far more important to the success of the business than 15 slides of how cool your idea is.
arturadib 16y ago
I still think that the best predictors for success are variables that characterize the founders (smarts, perseverance, adaptability, etc), rather than their initial ideas or pitches. People like to dissect ideas and pitches because that's a lot easier to do than assess the competence of the founders. (Via for example, recommendation letters, but that's a whole new topic). Try doing this: Read "Founders at Work" or some other collection of startup stories, and try to identify any pattern in the initial ideas that were reasonable predictors of success. I am sure you will scratch your head for a long time before realizing that it's all about the founders: how they adapted to the circumstances, how they dealt with the tough times, etc. (Ask the very author of the post above!). My family is full of successful entrepreneurs in totally different market segments (ice cream shops, uninterruptible power supplies, ornamental rocks, etc), and frankly if I didn't know them I'd think they'd all flop: their markets were saturated at the time, they were non-experts, and there was no clear "competitive advantage". I love the following quote from my cousin (the most recent and already very successful entrepreneur in the family), when talking about how he dealt with all sorts of difficulties with his company: Sometimes I'm afraid of what I might want in the future. Because it seems like if I really want something, there doesn't seem to exist anything I can't have. (Loosely translated from Portuguese).
- j_baker 16y ago
  This sounds to me like the Fundamental attribution error[1]: Attributing too much to the person and not enough to their situation. Smart, motivated people will eventually succeed. However, that doesn't mean that every given startup they found will succeed. A lot of people will go through a few startups before they get it right. [1] http://en.wikipedia.org/wiki/Fundamental_attribution_error http://en.wikipedia.org/wiki/Fundamental_attribution_error
  - arturadib 16y ago
    Wait, did you also factor in everything I said after "smarts"? And did you interpret prediction variables as crystal balls with 100% accuracy? All I'm saying is that, based on historical accounts, initial ideas/pitches do not seem to be good predictors of success. The only patterns I have noticed have to do with the founders (not just smarts!). But maybe you have noticed something else? Or perhaps no pattern at all??
ntoshev 16y ago
The founders he admires (Gates&Allen, Jobs&Wozniak, Page&Brin) probably wouldn't be able to articulate competitive advantages that this guy considers "real". They didn't have insider info or authority. They were passionate about what they are doing, but who knows if they were more passionate than their competitors (also applying this point to Apple for design and Google for search is not correct; Apple sacrifices very little to make their products look beautiful (and this is a narrow understanding of design), Google founders cared more about collaborative filtering at first).
- rgr23 16y ago
  Same goes for the founders of Facebook, Twitter, Amazon, Craigslist, Ebay, Yahoo, etc.
  - JesseAldridge 16y ago
    Those companies (except maybe Yahoo) had the advantage of being the first to get-it-right in markets that tend toward natural monopoly (due to network effects).
deleted 16y ago
[deleted]
paraschopra 16y ago
There are a ton of successful companies that don't fit any of the criteria (Facebook, Nike, McDonald's, etc) In fact I have to think hard to come up with companies that may have had unfair advantages. So, while unfair advantages may work in your favor. Not having them (yet being successful) may actually be a norm.
- chc 16y ago
  Zuckerberg was a college student when he developed The Facebook, so he at least had the insider advantage over his competition at the time (Myspace, Friendster, Orkut). This also ties into the fact that his product was a lot more narrowly focused, which leads to the "single-mindedness" advantage and was absolutely crucial to Facebook's success. I don't know enough about the history of Nike or McDonald's to comment there.
btilly 16y ago
What is sad is to see a company with a competitive advantage fail to see it and throw it away. I used to work at Rent.com. A key competitive advantage is that its revenue cycle is wrong. When it started its competitors all made money as soon as they referred someone. Rent.com only made money after the person was referred, leased, reported it to us, the apartment was contacted, and the apartment paid. Optimizing for this was difficult, but once Rent.com had traction none of its competitors could afford to switch models because that would open them up for apples to apples comparisons, with a company that had already been optimized, when they didn't even know how to track that data! Then Rent.com got a new, well-funded, competitor called MyNewPlace.com with deep industry connections. Same model. Some people there used to be at Rent.com. Absolutely no idea how to implement. This is where Rent.com should have increased their spend on advertising to the point where the unoptimized upstart was losing money on every sale and Rent.com was making money. Wait until the competitor went under. Then cut back on advertising. Unfortunately Rent.com had been purchased by eBay, eBay didn't understand Rent.com's business model, and so Rent.com was forced to squeeze margins. This gave MyNewPlace all the time in the world to figure out the business model. Worse yet, Rent.com put someone in charge of internet advertising who completely didn't understand affiliate relationships (even at break-even they are profitable because of positive SEO), and that self-inflicted wound only helped MyNewPlace more. It was a great competitive advantage. No competitor should have been allowed to flourish. But if you don't understand your competitive advantage, it is easy to throw it away. And they did.
- patio11 16y ago
  even at break-even [affiliates] are profitable because of positive SEO Not necessarily true in all cases, but broadly accurate. Also, you can work the backend. (Solicit upgrades, upsells, and repeat purchases from the customer, which would typically not result in you paying additional commissions to the affiliate.)
  - btilly 16y ago
    It was certainly accurate in Rent.com's case. Working the backend is another good idea, but not one that Rent.com used. (Typically once people have found a place to live, they aren't in immediate need of another.)
Scott_MacGregor 16y ago
Very well written, I got a lot out of this. I think it provides a good framework for thinking about this part of the business.
obama123789 16y ago
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baguasquirrel 16y ago
I keep hearing about "complementary skill sets", but what was complementary about Brin and Page? They were both computer scientists with a mathematical bent.
yurylifshits 16y ago
I think number #1 competitive advantage is Distribution. Microsoft got to be an exclusive OS for IBM PC. Yahoo got a free button in Netscape. Kindle was pushed by Amazon (the default place for book buyers)
- JesseAldridge 16y ago
  Distribution is definitely big. Look at how much the top iPhone apps make, look at Farmville. People generally will not seek stuff out. They will only consume stuff that's placed directly in front of them, like pigs at a trough.

211 points by stakent 16y ago

I like it! These advantages sound very good. But my problem is that these are reformulations of the 'fake' advantages for purposes of marketing to VCs, rather than any substantial actual difference IMO. It seems to me like fake advantages Passion + Feature = Real Adv One Thing and PhDs / MBAs is simply one way of saying Dream Team. I mean as a marketing term 'Dream Team' is even less substantial than PhDs / MBAs.

smartbear 16y ago
I would take a proven entrepreneur over an MBA and a proven uber-coder-geek over an MBA any day of the week, and most VCs would too.
- Charuru 16y ago
  Not a real dichotomy though...
- lol 16y ago
  Denigrating MBAs is no different than denigrating degrees in CS or CE. The question is always 'what do you bring to the table?' This might illustrate how utterly moronic your statement was: > I would take a proven entrepreneur over a random CS grad and a proven uber-coder-geek over a random CS grad any day of the week, and most VCs would too. Sure... it's still true. But it's only true because your original statement is utter nonsense.
- deleted 16y ago
  [deleted]

atomical 16y ago

It's good to see someone admit that they didn't have an advantage in the market place and then built something great.

cookiecaper 16y ago
I think there's too much focus on initial advantages. There are a lot of people that make a lot of money by starting restaurants, dry cleaners, book stores, and other run-of-the-mill, every-day things in common and saturated markets. The idea that you have to have something earth-shaking to be a successful entrepreneur is far too pervasive, imo. The real thing is that you start, persist, and have some semblance of the skills that you need and a lot of dedication and perseverance.

ohashi 16y ago

He makes a fair point, those are definitely competitive advantages. Now the question becomes, most companies won't have them but they will still be expected. Then what? Of course, where do we draw the line? semi-fame? is that competitive advantage? I have 20,000 twitter followers? 100,000? 1 million? (or mailing list members, rss feed subscribers, whatever metric you want).

dgudkov 16y ago

Good article. Asking questions like "what would you do if someone will fully copy you" is a bit dirty trick. Abstract competitors are always better, so it's meaningless to talk about them. Real competitors, even very smart and mighty, can't cover everything - they must limit themselves to something (market niche, demography, geography, price range etc.), and this may become a chance to avoid competition.

smartbear 16y ago
I certainly agree with you in practice. Think of this like an Einstein thought-experiment -- it's not how you should run your life every day, but it's maybe a nice foil for thinking about such things.

jargon 16y ago

None of these are competitive advantages that are the opposite of the suggestions from the previous post about things that are not competitive advantages. There are plenty of people who are passionate about their startups, working in a team of talented people, with customers, and insider information. If a company went to a VC and used these competitive advantages, they'd be shot down in a second. Imagine this scenario: Hi, I'm jargon. I am really super passionate about this idea and it's in my knowledge domain, because I have retail store. I'm a programmer with a retail store who has this software that I wrote to help me manage my retail store. I got 5 other retail stores on my block to buy it because it is so awesome. No other company is going to be able to compete with it, because all I care about is retail store software. Plus, we got Donald Trump to market it for us! What VC in their right mind would ever invest in something like that?

smartbear 16y ago
In your italicized text, it was good up until "No other company is going to compete with it." The point isn't that you have no competition, but that you have enough raw material to be competitive yourself. The point isn't that you're guaranteeing success, but that since most pitches (that I see) don't include ANY of the advantages you just listed, those that DO have those advantages look a lot better at the outset. Of course anyone can succeed, and many should try. But that's not how investors think; they think in terms of reducing risk, and things like past success and traction are ways of reducing risk.
gamble 16y ago
You're in a pretty sweet position if you can go to an investor and say: 1) I'm an expert in my target market. 2) I have a functional product deployed in a real environment. 3) I have five other customers lined up already. You'd be sitting better than 95% of startups, even if The Donald isn't shilling for you.
SoftwareMaven 16y ago
If I could go into my investors with 5 signed contracts and an endorsement from somebody like Donald (assuming it was actually relevant to the product), I can guarantee they would be standing on their seats cheering. Your pitch has outlined very real successes that are far more important to the success of the business than 15 slides of how cool your idea is.

arturadib 16y ago

I still think that the best predictors for success are variables that characterize the founders (smarts, perseverance, adaptability, etc), rather than their initial ideas or pitches. People like to dissect ideas and pitches because that's a lot easier to do than assess the competence of the founders. (Via for example, recommendation letters, but that's a whole new topic). Try doing this: Read "Founders at Work" or some other collection of startup stories, and try to identify any pattern in the initial ideas that were reasonable predictors of success. I am sure you will scratch your head for a long time before realizing that it's all about the founders: how they adapted to the circumstances, how they dealt with the tough times, etc. (Ask the very author of the post above!). My family is full of successful entrepreneurs in totally different market segments (ice cream shops, uninterruptible power supplies, ornamental rocks, etc), and frankly if I didn't know them I'd think they'd all flop: their markets were saturated at the time, they were non-experts, and there was no clear "competitive advantage". I love the following quote from my cousin (the most recent and already very successful entrepreneur in the family), when talking about how he dealt with all sorts of difficulties with his company: Sometimes I'm afraid of what I might want in the future. Because it seems like if I really want something, there doesn't seem to exist anything I can't have. (Loosely translated from Portuguese).

j_baker 16y ago
This sounds to me like the Fundamental attribution error[1]: Attributing too much to the person and not enough to their situation. Smart, motivated people will eventually succeed. However, that doesn't mean that every given startup they found will succeed. A lot of people will go through a few startups before they get it right. [1] http://en.wikipedia.org/wiki/Fundamental_attribution_error http://en.wikipedia.org/wiki/Fundamental_attribution_error
- arturadib 16y ago
  Wait, did you also factor in everything I said after "smarts"? And did you interpret prediction variables as crystal balls with 100% accuracy? All I'm saying is that, based on historical accounts, initial ideas/pitches do not seem to be good predictors of success. The only patterns I have noticed have to do with the founders (not just smarts!). But maybe you have noticed something else? Or perhaps no pattern at all??

ntoshev 16y ago

The founders he admires (Gates&Allen, Jobs&Wozniak, Page&Brin) probably wouldn't be able to articulate competitive advantages that this guy considers "real". They didn't have insider info or authority. They were passionate about what they are doing, but who knows if they were more passionate than their competitors (also applying this point to Apple for design and Google for search is not correct; Apple sacrifices very little to make their products look beautiful (and this is a narrow understanding of design), Google founders cared more about collaborative filtering at first).

rgr23 16y ago
Same goes for the founders of Facebook, Twitter, Amazon, Craigslist, Ebay, Yahoo, etc.
- JesseAldridge 16y ago
  Those companies (except maybe Yahoo) had the advantage of being the first to get-it-right in markets that tend toward natural monopoly (due to network effects).

deleted 16y ago

[deleted]

paraschopra 16y ago

There are a ton of successful companies that don't fit any of the criteria (Facebook, Nike, McDonald's, etc) In fact I have to think hard to come up with companies that may have had unfair advantages. So, while unfair advantages may work in your favor. Not having them (yet being successful) may actually be a norm.

chc 16y ago
Zuckerberg was a college student when he developed The Facebook, so he at least had the insider advantage over his competition at the time (Myspace, Friendster, Orkut). This also ties into the fact that his product was a lot more narrowly focused, which leads to the "single-mindedness" advantage and was absolutely crucial to Facebook's success. I don't know enough about the history of Nike or McDonald's to comment there.

btilly 16y ago

What is sad is to see a company with a competitive advantage fail to see it and throw it away. I used to work at Rent.com. A key competitive advantage is that its revenue cycle is wrong. When it started its competitors all made money as soon as they referred someone. Rent.com only made money after the person was referred, leased, reported it to us, the apartment was contacted, and the apartment paid. Optimizing for this was difficult, but once Rent.com had traction none of its competitors could afford to switch models because that would open them up for apples to apples comparisons, with a company that had already been optimized, when they didn't even know how to track that data! Then Rent.com got a new, well-funded, competitor called MyNewPlace.com with deep industry connections. Same model. Some people there used to be at Rent.com. Absolutely no idea how to implement. This is where Rent.com should have increased their spend on advertising to the point where the unoptimized upstart was losing money on every sale and Rent.com was making money. Wait until the competitor went under. Then cut back on advertising. Unfortunately Rent.com had been purchased by eBay, eBay didn't understand Rent.com's business model, and so Rent.com was forced to squeeze margins. This gave MyNewPlace all the time in the world to figure out the business model. Worse yet, Rent.com put someone in charge of internet advertising who completely didn't understand affiliate relationships (even at break-even they are profitable because of positive SEO), and that self-inflicted wound only helped MyNewPlace more. It was a great competitive advantage. No competitor should have been allowed to flourish. But if you don't understand your competitive advantage, it is easy to throw it away. And they did.

patio11 16y ago
even at break-even [affiliates] are profitable because of positive SEO Not necessarily true in all cases, but broadly accurate. Also, you can work the backend. (Solicit upgrades, upsells, and repeat purchases from the customer, which would typically not result in you paying additional commissions to the affiliate.)
- btilly 16y ago
  It was certainly accurate in Rent.com's case. Working the backend is another good idea, but not one that Rent.com used. (Typically once people have found a place to live, they aren't in immediate need of another.)

Scott_MacGregor 16y ago

Very well written, I got a lot out of this. I think it provides a good framework for thinking about this part of the business.

obama123789 16y ago

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baguasquirrel 16y ago

I keep hearing about "complementary skill sets", but what was complementary about Brin and Page? They were both computer scientists with a mathematical bent.

yurylifshits 16y ago

I think number #1 competitive advantage is Distribution. Microsoft got to be an exclusive OS for IBM PC. Yahoo got a free button in Netscape. Kindle was pushed by Amazon (the default place for book buyers)

JesseAldridge 16y ago
Distribution is definitely big. Look at how much the top iPhone apps make, look at Farmville. People generally will not seek stuff out. They will only consume stuff that's placed directly in front of them, like pigs at a trough.