Startup general interest

A note on first mover advantage – there is none

By March 24, 2010 14 Comments

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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