First mover advantage — Should VC’s care?
At a recent talk, Ajay Royan, Co-founder of Mithril Capital elegantly debunked the first mover advantage in startup investing. “Paypal, Facebook, Google, Airbnb, Uber — none of these companies were first movers. Rather, these companies did one thing really well — they shut the door behind them. The rest is history.”
Facebook had over 20 competitors when it launched. Six months before its launch, Friendster, one of its competitors, had raised $13 million Series B from big name VCs like Kleiner Perkins, Benchmark and Battery Ventures. This was in 2003, when $13 million was real money. Orkut, another social networking rival, re-launched its service three months before Facebook’s launch. Orkut was backed by search giant Google. And six months after Facebook’s launch, MySpace boasted nearly 5 million users. Social networks had clearly seen a deluge of startups.
With search engines, the story is not too different. Google was the 18th search engine born five years after the first search engine was launched. The market was a noisy mess. You had Infoseek, Lycos, AltaVista, AskJeeves, Excite to name a few. (One search engine was even called Dogpile.) And prior to AirBnb, there was VRBO. In the ridesharing world, before Uber came SideCar and Lyft.
So if VCs are to look at something beyond the first mover advantage, what is it? “Look at the market — can this market withstand an ‘A-’ founder?” asks Royan. “We should choose the correct markets — and then ask, not only are these addressable but are these ownable?”
Mark Zuckerberg was a first time founder when Thiel invested $500,000 in Facebook. At a $5m capped note, Thiel got~10% ownership in Facebook. If this was just left-brain analysis, Thiel would look askance at Zuckerberg and might say, “but you have no experience in building a company, raising capital, building teams, scaling...” Instead, all Thiel said was ‘just dont fuck it up’ and wrote him a check.
Royan, who has been investing with Peter Thiel for over a decade, is a soft-spoken contrarian. The questions he throws seem obvious in hindsight, yet hidden from plain sight. His canvas is wide — he can mix equal parts human psychology, technology trend, macroeconomics, policy — all is the quest of finding alpha.
“A lot of investors are driven by momentum, and are in VC with a speculative mindset. You have to be deterministic” says Royan.
In mathematics and physics, a deterministic system is a system in which no randomness is involved in the development of future states of the system. A deterministic model will thus always produce the same output from a given starting condition or initial state.
Achieving a deterministic state may be the harder part of a VC business. In this inconsistent world, give me consistent returns, gripe many LPs. The business of venture capital is messy, unpredictable and has far too many variables that come into play.
But now we know for sure that the first mover advantage is not a determinant of success. Instead of agonizing if this is a A+ team, flip the logic over its head. Ask if the market can withstand an A- team? While Total Addressable Market (TAM) is important, it’s also important to look at an ‘ownable’ market. And once you make an investment, figure out if this team can shut the door behind them!
