First Movers and Fast Followers in the Developing World
Conventional wisdom holds that being first to market is a strategic advantage. The concept certainly does have an intuitive appeal. After all, there are countless examples of market pioneers who have maintained an ‘always chased, never caught’ position of market dominance. There’s Ford in the car industry, eBay in online auction services, Intel in microprocessors, Amazon in eCommerce, and the list goes on. But for every first-mover that has gained a durable competitive advantage, there are twenty others who have failed to come out on top despite an auspicious head start. Think Netscape, Yahoo, MySpace and Friendster, Polaroid just to name a few.
Market pioneers have greenfield opportunity to establish a powerful brand, set industry standards, win the loyalty of first adopters, establish economies of scale, and secure early market share. However, first movers also bear the burden of developing a new market from the ground up. They have to deal with things like validating product-market fit, testing customer readiness, educating first-time users, and toppling legislative barriers. Market trailblazing is a thankless job and often times first-movers end up subsidizing industry development, paving the way for followers to enter more quickly, at a lower cost, and with a diminished risk profile than their predecessors.
Being the first to break ground in a new market may confer certain advantages, but by no means does it guarantee success. So, what is the value of being first to market? How much does every day, week or month of wasted lead time cost you? Or is actually to your benefit to hold back and draft the industry leader?
At Blue Haven we invest in startups in emerging markets, and, unsurprisingly, there’s a major gap in the literature on how first-mover advantage plays out in the developing world. I know that making inferences about the developing world based on learnings and observations in the developed world is a tempting but often misleading practice. So, what happens to first-movers who operate in an environment with scarcity of tech talent, political uncertainty, currency fluctuations, abysmal competitive alternatives, a weak legal backbone, limited logistics providers, uncertain IP protection, and the list goes on…? Which of these variables amplify first-mover advantage and which undermine the efforts of brave early entrants?
As far as I can tell there are no empirical answers to these questions. At first glance it seems like the challenges of being a first-mover in an already challenging emerging market context could be crippling. When you dig deeper, however, the answer becomes less obvious. Harvard Business Review suggests that the two most powerful factors in determining a first-mover’s fate are the pace of technological evolution and the rate at which the market for the product is expanding. A first-mover has the best chance of establishing a durable competitive advantage in an industry with gradual evolution of technology and markets. The reasoning goes that gradual technological evolution tends to benefit the first mover by making it harder for new entrants to differentiate their products, while slow initial market expansion makes it difficult for fast-followers to grab market share and establish a competitive foothold.
When you look at the context of developing markets you generally see slower technological innovation and slower customer adoption than in the developed world, not to mention higher barriers to entry deterring the likes of copy-cat competitors. If you believe HBR, it seems like emerging markets would be some of the most fertile grounds for first movers to operate.
At BHI we invest in first-movers. We also invest in (differentiated) second movers. I believe that when you’re first to market you have a head start in an inevitable land grab, but you’re also the one making the first mistakes and bearing the costs of market development. Elon Musk is busy building the charging infrastructure for a future where the only cars on the road are electric. Is he providing a public good under the guise of an unprofitable Silicon Valley darling? Or will there be a big payoff associated with Tesla’s prescient investment? Two of our current portfolio companies are investing in educating customers on a revolutionary pay-as-you-go business model that’s transforming the way energy is delivered to rural consumers in various regions of Sub-Saharan Africa. We asked ourselves similar questions when we invested in them, and I think you can guess which side of the fence we fell off on.
We have faith that the first-movers in our portfolio will translate their head start into long-term success, but ultimately that is not why we bet on them. I don’t believe in ‘first-mover advantage’ in a vacuum. I believe some entrepreneurs are uniquely qualified to operate as first movers in these markets. If you’re humble, nimble, and resilient enough to embrace the challenges that come with being a pioneer you can make your first-to-market position work for you in any environment. If you are third to market but are able to differentiate your product, build a popular brand, develop a loyal customer base, and shrewdly learn from the successes and failure of your predecessors, I’m also willing to take a bet on you. Regardless of whether you are first or last to market, you need to be a long-term thinker who is capable of iterating quickly and learning from your mistakes. Building a company is less of a road race than it is a strategy game with complex decision making, unforeseen hurdles, and concealed opportunities to accelerate growth. So, ironically, I actually think it’s the wrong question to be asking.