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A note on first mover advantage – there is none

image A frequent argument from startups raising venture capital is that they are first to market and want to have sufficient capital to push home their first mover advantage.  There is a ‘window’, so the logic goes, in which it will be easier to be successful.  Such arguments have always sounded a bit dubious to me and yesterday in Steve Blank’s The Four Steps to the Epiphany I read about some research which shows I was right to doubt.  In a 1993 paper Golder and Tellis found that 47% of the market pioneers in their sample of 500 brands in 50 product categories failed.  It is the early market leaders who are more likely to be successful (this group had an 8% failure rate).  And the average time between the launch of the pioneers and early market leaders? – 13 years. 

The time to raise money and go aggressively after a market opportunity is not therefore when there is first mover advantage.  I would argue (along with Blank) that it is rather when the market is ready to take off, as evidenced by good product-market fit and a repeatable sales/customer acquisition model.  Moreover, you don’t need to be the first to market to become the early market leader, much more important is to show up at the right time with the right product and execute well.

Last week Fred Wilson showed some similar thinking about the best time to go aggressively after a market when writing about the merits of fat versus lean startups:

Traction and product market fit are customers or users buying or using your product in droves. It is the realization that you’ve found the sweet spot of the market you were going for …… I have never been involved in a successful software-based web service that raised and spent boatloads of money before it found it’s sweet spot.

In other words it is important to time the market right, not to be the first into it.

And it can be a long time between when a market starts, as evidenced by first sale, and when it takes off.  In the study mentioned above the average was 13 years, since then innovation cycles have shortened since then and I would guess the average has come down, but probably not by that much.  Google was still some way behind Yahoo!, and Facebook was someway behind Myspace, which was itself behind Friendster, and Friendster wasn’t even the first social network.

If you are wondering where the notion of ‘first mover advantage’ came from, it apparently originated in a 1988 business school paper from a Stanford professor called David Montgomery and his partner Marvin Lieberman.  Ten years later they retracted the idea in a retrospective paper, but not before a generation of business school grads had been schooled on the idea and taken it to Silicon Valley as the theoretical underpinning of the ‘get big fast’ strategies of the dotcom era.

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  • http://www.alanodea.com alanodea

    Steve Blank is an inspirational guru to web and game start-ups. We use 4 steps as our bible at the moment.

  • http://lmframework.com/blog/about David Semeria

    I think a lot depends on the vertical. For example, Twitter was first to move and executed well. In the broad-based micro blogging vertical its position is pretty much unassailable. I would say first mover advantage is stronger where there are networks effects, but network effects by themselves (MySpace) don't themselves guarantee success.

  • afternoon

    It's amazing that this myth has persisted with so many high-profile counter-examples. Great to see some hard data.

  • http://twitter.com/vcwatch ACM Johnson

    Nic,
    The notion of first mover advantage is enhanced by survivorship bias: Cisco wasn't the first router vendor, Google wasn't the first search engine. If a business can get its early customer base in an existing market, that takes less time/money/burn than trying to make a new market. Saying this from first hand experience ..

  • http://www.digispeaker.com Jon Smirl

    I have a dead startup in my past that was simply too early. We expanded and blew all of our VC because the sales cycle was too hard. About two years latter the market took off, demand had changed and businesses were receptive without expensive selling. Three years after that there were several large exits.

    There is a first mover advantage when natural monopolies are involved, but there are very few natural monopolies like Microsoft.

  • http://www.theequitykicker.com brisbourne

    True – but you also don't want to be too late. Timing is tricky.

  • http://www.theequitykicker.com brisbourne

    Hi David – arguably Twitter is in the blogging market and built on the back of less successful companies like Blogger.

  • http://www.theequitykicker.com brisbourne

    Good to hear. It is a fantastic book.

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  • http://www.moviestorm.co.uk/ Dave Lloyd

    There's an old saying: the pioneers are the ones with the arrows in their backs, better to be a settler. I've seen this born out too many times now…

  • http://www.theequitykicker.com brisbourne

    I like the analogy

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